bkm 10e chap003 sm final (1)

8/12/2019 BKM 10e Chap003 SM Final (1)

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CHAPTER 3: HOW SECURITIES ARE TRADED


PROBLEM SETS

1. Stop-loss order: allows a stock to e sold !" t#e pr!ce "alls elow a predeter$!%edle&el. Stop-loss orders o"te% acco$pa%' s#ort sales. (!$!t sell order: sells stockw#e% t#e pr!ce r!ses ao&e a predeter$!%ed le&el. )arket order: e!t#er a *' or sellorder t#at !s e+ec*ted !$$ed!atel' at t#e c*rre%t $arket pr!ce

,. I% respo%se to t#e pote%t!al %eat!&e react!o% to lare lock/ trades0 trades w!ll e spl!t*p !%to $a%' s$all trades0 e""ect!&el' #!d!% t#e total %*$er o" s#ares o*#t or sold.

3. T#e *se o" le&erae %ecessar!l' $a%!"!es ret*r%s to !%&estors. (e&era!%

orrowed $o%e' allows "or reater ret*r% o% !%&est$e%t !" t#e stock pr!ce !%creases.Howe&er0 !" t#e stock pr!ce decl!%es0 t#e !%&estor $*st repa' t#e loa%0 reardless o"#ow "ar t#e stock pr!ce drops0 a%d !%c*r a %eat!&e rate o" ret*r%. or e+a$ple0 !" a%!%&estor *'s a% asset at 21 a%d t#e pr!ce r!ses to 2110 t#e !%&estor ear%s 14.I" a% !%&estor takes o*t a 25 loa% at 64 a%d *'s t#e sa$e stock0 t#e ret*r% w!ll e13.340 co$p*ted as "ollows: 21 cap!tal a!% $!%*s 2, !%terest e+pe%se d!&!ded 't#e 27 or!!%al !%&est$e%t. O" co*rse0 !" t#e stock pr!ce "alls elow 210 t#e%eat!&e ret*r% w!ll e reater "or t#e le&eraed acco*%t.

5. 8a9 A $arket order !s a% order to e+ec*te t#e trade !$$ed!atel' at t#e est poss!le

pr!ce. T#e e$p#as!s !% a $arket order !s t#e speed o" e+ec*t!o% 8t#e red*ct!o%o" e+ec*t!o% *%certa!%t'9. T#e d!sad&a%tae o" a $arket order !s t#at t#e pr!ceat w#!c# !t w!ll e e+ec*ted !s %ot k%ow% a#ead o" t!$e !t t#*s #as pr!ce*%certa!%t'.

6. 8a9 A roker $arket co%s!sts o" !%ter$ed!ar!es w#o #a&e t#e d!scret!o% to trade "ort#e!r cl!e%ts. A lare lock trade !% a% !ll!;*!d sec*r!t' wo*ld $ost l!kel'trade !% t#!s $arket as t#e rokers wo*ld #a&e t#e est access to cl!e%ts!%terested !% t#!s t'pe o" sec*r!t'.

T#e ad&a%tae o" a% electro%!c co$$*%!cat!o% %etwork 8EC


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7. a. T#e stock !s p*rc#ased "or: 3 25 = 21,0

T#e a$o*%t orrowed !s 250. T#ere"ore0 t#e !%&estor p*t *p e;*!t'0 or$ar!%0 o" 2>0.

. I" t#e s#are pr!ce "alls to 230 t#e% t#e &al*e o" t#e stock "alls to 2?0. @' t#ee%d o" t#e 'ear0 t#e a$o*%t o" t#e loa% owed to t#e roker rows to:

250 1.> = 2503,

T#ere"ore0 t#e re$a!%!% $ar!% !% t#e !%&estors acco*%t !s:

2?0 2503, = 2507>

T#e perce%tae $ar!% !s %ow: 2507>B2?0 = .6,0 or 6,4

T#ere"ore0 t#e !%&estor w!ll %ot rece!&e a $ar!% call.

c. T#e rate o" ret*r% o% t#e !%&est$e%t o&er t#e 'ear !s:

8E%d!% e;*!t' !% t#e acco*%t I%!t!al e;*!t'9BI%!t!al e;*!t'

= 82507> 2>09B2>0 = .5160 or 51.64

Alter%at!&el'0 d!&!de t#e !%!t!al e;*!t' !%&est$e%ts !%to t#e c#a%e !% &al*epl*s t#e !%terest pa'$e%t:

8230 loss 23, !%terest9B2>0 = -.516.

. a. T#e !%!t!al $ar!% was: .6 10 25 = 2,0

As a res*lt o" t#e !%crease !% t#e stock pr!ce Old Eco%o$' Traders loses:

21 10 = 210

T#ere"ore0 $ar!% decreases ' 210. )oreo&er0 Old Eco%o$' Traders$*st pa' t#e d!&!de%d o" 2, per s#are to t#e le%der o" t#e s#ares0 so t#at t#e$ar!% !% t#e acco*%t decreases ' a% add!t!o%al 2,0. T#ere"ore0 t#ere$a!%!% $ar!% !s:

2,0 210 2,0 = 2>0

. T#e perce%tae $ar!% !s: 2>0B260 = .170 or 174

So t#ere w!ll e a $ar!% call.

c. T#e e;*!t' !% t#e acco*%t decreased "ro$ 2,0 to 2>0 !% o%e 'ear0 "or a

rate o" ret*r% o": 821,0B2,09 = .70 or 74

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>. a. T#e *' order w!ll e "!lled at t#e est l!$!t-sell order pr!ce: 26.,6

. T#e %e+t $arket *' order w!ll e "!lled at t#e %e+t-est l!$!t-sellorder pr!ce: 261.6

c. Fo* wo*ld wa%t to !%crease 'o*r !%&e%tor'. T#ere !s co%s!derale *'!%de$a%d at pr!ces G*st elow 260 !%d!cat!% t#at dow%s!de r!sk !s l!$!ted. I%co%trast0 l!$!t sell orders are sparse0 !%d!cat!% t#at a $oderate *' order co*ldres*lt !% a s*sta%t!al pr!ce !%crease.

?. a. Fo* *' , s#ares o" Teleco$ "or 210. T#ese s#ares !%crease !% &al*e '

140 or 210. Fo* pa' !%terest o": .> 260 = 25

T#e rate o" ret*r% w!ll e:

210 25.1, 1,4

260

= =

. T#e &al*e o" t#e , s#ares !s ,P. E;*!t' !s 8,P 2609. Fo* w!llrece!&e a $ar!% call w#e%:

P

P

,33

333062,33 = .3 w#e% P= 236.1 or lower

1. a. I%!t!al $ar!% !s 64 o" 2600 or 2,06.

. Total assets are 206 8260 "ro$ t#e sale o" t#e stock a%d 2,06 p*t *p "or

$ar!%9. (!a!l!t!es are 1P. T#ere"ore0 e;*!t' !s 8206 1P9. A $ar!%call w!ll e !ss*ed w#e%:

P

P

133

1336330D2 = .3 w#e% P= 26.7? or #!#er

11. T#e total cost o" t#e p*rc#ase !s: 2, 10 = 2,0

Fo* orrow 260 "ro$ 'o*r roker a%d !%&est 2160 o" 'o*r ow% "*%ds.Fo*r $ar!% acco*%t starts o*t w!t# e;*!t' o" 2160.

a. 8!9 E;*!t' !%creases to: 82,, 109 260 = 210

Perce%tae a!% = 2,0B2160 = .13330 or 13.334

8!!9 W!t# pr!ce *%c#a%ed0 e;*!t' !s *%c#a%ed.

Perce%tae a!% = ero

8!!!9 E;*!t' "alls to 821> 109 260 = 2130

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Perce%tae a!% = 82,0B21609 = .13330 or 13.334

T#e relat!o%s#!p etwee% t#e perce%tae ret*r% a%d t#e perce%tae c#a%e !%t#e pr!ce o" t#e stock !s !&e% ':

4 ret*r% = 4 c#a%e !% pr!ce e;*!t'!%!t!alsI%&estor

!%&est$e%tTotal= 4 c#a%e !% pr!ce 1.333

or e+a$ple0 w#e% t#e stock pr!ce r!ses "ro$ 2, to 2,,0 t#e perce%tae c#a%e !%pr!ce !s 140 w#!le t#e perce%tae a!% "or t#e !%&estor !s:

4 ret*r% = 14 0162

0,2= 13.334

. T#e &al*e o" t#e 10 s#ares !s 10P. E;*!t' !s 810P 2609. Fo* w!llrece!&e a $ar!% call w#e%:

P

P

01

06201 = .,6 w#e% P= 27.7 or lower

c. T#e &al*e o" t#e 10 s#ares !s 10P. @*t %ow 'o* #a&e orrowed 210!%stead o" 260. T#ere"ore0 e;*!t' !s 810P 2109. Fo* w!ll rece!&e a$ar!% call w#e%:

P

P

01

01201 = .,6 w#e% P= 213.33 or lower

W!t# less e;*!t' !% t#e acco*%t0 'o* are "ar $ore &*l%erale to a $ar!% call.

d. @' t#e e%d o" t#e 'ear0 t#e a$o*%t o" t#e loa% owed to t#e roker rows to:

260 1.> = 2605

T#e e;*!t' !% 'o*r acco*%t !s 810P 26059. I%!t!al e;*!t' was 2160.T#ere"ore0 'o*r rate o" ret*r% a"ter o%e 'ear !s as "ollows:

8!93330162

33301625330629,,2333018 = .170 or 1.74

8!!93330162

33301625330629,32333018 = .,70 or ,.74

8!!!93330162

333016253306291>2333018 = .170 or 17.4

T#e relat!o%s#!p etwee% t#e perce%tae ret*r% a%d t#e perce%tae c#a%e !%t#e pr!ce o" I%tel !s !&e% ':

4 ret*r% =

e;*!t'!%!t!alsI%&estor

!%&est$e%tTotalpr!ce!%c#a%-e4

e;*!t'!%!t!alsI%&estor

orrowed1*%ds4>

or e+a$ple0 w#e% t#e stock pr!ce r!ses "ro$ 25 to 2550 t#e perce%taec#a%e !% pr!ce !s 140 w#!le t#e perce%tae a!% "or t#e !%&estor !s:

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3330162

3330,32413

3330162

3330624> =1.74

e. T#e &al*e o" t#e 1 s#ares !s 10P. E;*!t' !s 810P 26059. Fo* w!ll

rece!&e a $ar!% call w#e%:

P

P

01

506201 = .,6 w#e% P = 2., or lower

1,. a. T#e a!% or loss o% t#e s#ort pos!t!o% !s: 810 JP9

I%&ested "*%ds = 2160

T#ere"ore: rate o" ret*r% = 810 JP9B160

T#e rate o" ret*r% !% eac# o" t#e t#ree sce%ar!os !s:

8!9 Rate o" ret*r% = 810 2,9B2160 = .13330 or13.334

8!!9 Rate o" ret*r% = 810 29B2160 = 4

8!!!9 Rate o" ret*r% = 10 82,9/B2160 = .13330 or13.334

. Total assets !% t#e $ar!% acco*%t e;*al:

2,0 8"ro$ t#e sale o" t#e stock9 2160 8t#e !%!t!al $ar!%9 = 2360

(!a!l!t!es are 6P. Fo* w!ll rece!&e a $ar!% call w#e%:

P

P

01

010362 = .,6 w#e% P= 2,> or #!#er

c. W!t# a 21 d!&!de%d0 t#e s#ort pos!t!o% $*st %ow pa' o% t#e orrowed s#ares:

821Bs#are 1 s#ares9 = 21. Rate o" ret*r% !s %ow:

810 JP9 10/B160

8!9 Rate o" ret*r% = 810 2,9 210/B2160 = .,0 or

,.4

8!!9 Rate o" ret*r% = 810 29 210/B2160 = .770 or 7.74

8!!!9 Rate o" ret*r% = 8109 82,9 210/B2160 = .70 or

7.74

Total assets are 23600 a%d l!a!l!t!es are 810P 109. A $ar!% call w!lle !ss*ed w#e%:

P

P

01

0101036 = .,6 w#e% P = 2,., or #!#er

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13. T#e roker !s !%str*cted to atte$pt to sell 'o*r )arr!ott stock as soo% as t#e)arr!ott stock trades at a !d pr!ce o" 25 or less. Here0 t#e roker w!ll atte$pt toe+ec*te *t $a' %ot e ale to sell at 250 s!%ce t#e !d pr!ce !s %ow 23?.?6. T#epr!ce at w#!c# 'o* sell $a' e $ore or less t#a% 25 eca*se t#e stop-loss eco$es

a $arket order to sell at c*rre%t $arket pr!ces.

15. a. 266.6

. 266.,6

c. T#e trade w!ll %ot e e+ec*ted eca*se t#e !d pr!ce !s lower t#a% t#e pr!cespec!"!ed !% t#e l!$!t-sell order.

d. T#e trade w!ll %ot e e+ec*ted eca*se t#e asked pr!ce !s reater t#a% t#e pr!cespec!"!ed !% t#e l!$!t-*' order.

16. a. Fo* w!ll %ot rece!&e a $ar!% call. Fo* orrowed 2,0 a%d w!t# a%ot#er2,0 o" 'o*r ow% e;*!t' 'o* o*#t 10 s#ares o" D!s%e' at 25 pers#are. At 236 per s#are0 t#e $arket &al*e o" t#e stock !s 23600 'o*r e;*!t'!s 21600 a%d t#e perce%tae $ar!% !s: 2160B2360 = 5,.?4Fo*r perce%tae $ar!% e+ceeds t#e re;*!red $a!%te%a%ce $ar!%.

. Fo* w!ll rece!&e a $ar!% call w#e%:

P

P

01

0,201 = .36 w#e% P= 23. or lower

17. T#e proceeds "ro$ t#e s#ort sale 8%et o" co$$!ss!o%9 were: 82,1 19 26 = 2,06

A d!&!de%d pa'$e%t o" 2, was w!t#draw% "ro$ t#e acco*%t.

Co&er!% t#e s#ort sale at 216 per s#are costs 8w!t# co$$!ss!o%9: 2106 26 =21066

T#ere"ore0 t#e &al*e o" 'o*r acco*%t !s e;*al to t#e %et pro"!t o% t#e tra%sact!o%:

2,06 2, 21066 = 23


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CFA PROBLEMS

1. a. I% add!t!o% to t#e e+pl!c!t "ees o" 200 @< appears to #a&e pa!d a%

!$pl!c!t pr!ce !% *%derpr!c!% o" t#e IPO. T#e *%derpr!c!% !s 23 per s#are0 ora total o" 2300 !$pl'!% total costs o" 230.

.

bkm 10e chap003 sm final (1)

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