Chapter 3, Problem 7PS

Summary Introduction

(A)

An account was opened by Old Economy traders to short sell 1,000 shares of Internet dreams. The requirement of margin at the beginning accounts for 50%. The price of internet dream after 1 year increased from $40 to $50. The dividend paid by the stock per share accounts for $2

To calculate:

The remaining margin in old economy account.

Introduction:

Margin in the trading account refer to the minimum amount of money, which the investor is required to maintain in his account in the form of margin for placing a trade order.

Summary Introduction

(B)

To determine:

Whether Old economy traders will be able to receive the margin call if the requirement for margin maintenance is 30%

Introduction:

Margin call comes into picture when the investor is required to deposit additional securities or money so that the margin in the investor's account stands equivalent to the minimum margin requirement.

Summary Introduction

(C)

To calculate:

Rate of return on the investment made by Old economy traders

Introduction:

Rate of return refers to the net loss or gain ascertained out of an investment over a particular period of time. It is generally represented as percentage of the initial cost of investment.