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    Exploring Various Concepts in Asset Management

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    © BrainMass Inc. brainmass.com September 27, 2022, 4:18 pm ad1c9bdddf
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    1. We have,
    Number of shares bought=100
    Purchasing price of stock=$100 per share
    Initial Margin=60%
    Margin=100*$100*60%=$6,000

    Assets Liabilities and Equity
    100 Shares, Stock A 100*$100=$10,000 Margin Loan $4,000
    Account Equity $6,000
    Total $10,000 Total $10,000

    2. We have,
    Number of shares bought=100
    Purchasing price of stock=$70 per share
    Initial Margin=60%
    Margin=100*$70*60%=$4,200

    Assets Liabilities and Equity
    100 Shares, Stock A 100*$100=$10,000 Margin Loan $5,800
    Account Equity $4,200
    Total $10,000 Total $10,000

    Actual Margin=$4,200/$10,000=42%

    3. We have,
    Number of shares bought=100
    Purchasing price of stock=$100 per share
    Initial margin=60%
    Maintenance margin=30%
    Now,
    (100*P-$100*(1-60%)*100)/(100*P)=30%
    Or,
    100P-30P=$4,000
    Or,
    P=$4,000/70=$51.14

    4. We have,
    Number of shares bought=100
    Purchasing price of stock=$100 per share
    Initial margin=60%
    Maintenance margin=40%
    Now,
    (100*P-$100*(1-60%)*100)/(100*P)=40%
    Or,
    100P-40P=$4,000
    Or,
    P=$4,000/60=$66.67

    5. We have,
    Number of shares bought=100
    Purchasing price of stock=$130 per share
    Initial Margin=60%
    Margin=100*$130*60%=$7,800

    Assets Liabilities and Equity
    100 Shares, Stock A 100*$100=$10,000 Margin Loan $2,100
    Account Equity $7,800
    Total $10,000 Total $10,000

    Actual Margin=$7,800/$10,000=78%

    6. We have, if stock price increases to $130:
    Rate of return=(($130-$100)*100-$2,100*10%)/$10,000=27.9%

    If stock price declines to $70:

    Rate of return=(($70-$100)*100-$4,200*10%)/$10,000=-34.2%

    7. We have,
    Strike Price: An option give its owner the right to buy the a share of stock at a fixed price at pre-specified time, this fixed price is known as the strike price or exercise price.
    Option premium: Option premium is the price at which the option trades. The premium paid by the buyer is non refundable. Option premium has two components intrinsic value and time value.
    Long position in an option: Once the buyer purchased the option, then the buyer has a long position in the option.
    Short position in an option: Once the buyer sells the option, then the seller has the short position in the option.
    European option v/s American option: European option are the option that can only be exercised at the time of its expiration whereas American option can be exercised at any time up to its expiration date.
    Calls v/s put: Call option gives the holder the right but not the obligation to buy an asset at a certain price within a specified period of time whereas the put option is the option that gives its holder the right but not the obligation to sell an asset at certain price within a specified period of time.
    Intrinsic value: Intrinsic value of the option is the amount at which the option is said to be in the money.
    In-The-Money: It is an option that leads to a positive cash flow to the holder if it is exercised immediately.
    Out -of-The-Money: It is an option that leads to negative cash flow if exercised immediately.
    At-The-Money: It is an option that leads to a zero cash flow if exercised immediately.
    Speculative Value: It is also known a time value. Speculative value is created through the demand and supply force and it considers the carrying cost and opportunity cost.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com September 27, 2022, 4:18 pm ad1c9bdddf>
    https://brainmass.com/business/black-scholes-model/exploring-various-concepts-asset-management-541575

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