Scenario 1; Buying on Margin
Lisa opens a margin account and buys 600 shares of XYZ Inc. on margin at a price of $42 per
share. The share is NOT eligible for reduced margin.
What is the initial margin required upon purchase of these shares by Lisa? (2 Marks)
The price of XYZ Inc. rises to $48 after three days. What is the new margin requirement? Does
Lisa have an excess margin in the account or there is a margin deficiency? How much? (2
Marks)
Assuming that the price of XYZ Inc. falls to $38 after three days from the day of purchase. What
is the new margin requirement? Is there an excess margin or margin deficiency? How much?
(2Marks)
Lisa finally sells the XYZ Inc. stock when the price is $50. What is Lisa’s Capital Gain or Capital
Loss from this transaction? (2 Marks)
If XYZ company declared dividend while she has purchased the shares on margin, will she
receive dividend or not?
Scenario 2: Selling on Margin (Short Selling)
David opens a margin account for short-selling and sells 1200 shares of XYZ Inc. on margin at a
price of $47 per share. The share is eligible for reduced margin.
What is the initial margin required upon short sale of these shares by David? (2 Marks)
The price of XYZ Inc. rises to $55 after three days. What is the new margin requirement? Does
David have an excess margin in the account or there is a margin deficiency? How much?
(2Marks)
Assuming that the price of XYZ Inc. falls to $44 after three days from the day of purchase. What
is the new margin requirement? Is there an excess margin or margin deficiency? How much? (2
Marks)
David finally buys the XYZ Inc. stock when the price is $48. What is his Capital Gain or Capital
Loss from this transaction? (2 Marks)
If XYZ company declared dividend while his shares are still sold short, will he be responsible for
paying dividend to the buyer or not? (2)
CHAPTER-10
DERIVATIVES
Scenario #1
Vinod likes to buy and sell options and has opened an account for this purchase at a major
discount brokerage. Recently he bought 8 CALL contracts of Hit Mortons (HMT) Stock as per
the following details.
Strike Price: $57
Call Price (Premium): $10.50
Expiry Date: Jan 18, 2020
Market Price of HMT Stock: $62.50
Answer the following questions: (1 Mark for each question)
What are the rights/obligations of Vinod in this transaction?
How many shares does Vinod control?
Is this option in-the-money or out-of-the-money?
What is the Intrinsic Value of the Options?
What is the Time Value of the Options?
What is his maximum potential loss in this transaction?
What is his maximum potential gain in this transaction?
What is Vinod’s expectation of the future price of HMT stock?
If the market price of HMT stock goes up, what will happen to the price of HMT Option?
If the HMT company announces dividend of $2 per share during this period, will Vinod be
entitled for dividend?
Scenario #2
Vinod makes another transaction to SELL (WRITE) 9 PUT contracts of MNK Ltd stock as per
the following details.
Strike Price $93
Put Price (Premium) $9
Expiry Date: Jan 18, 2020
Market Price of MNK Stock: $98
Answer the following questions: (1 Mark for each question)
What are the rights/obligations of Vinod in this transaction?
How many shares does Vinod control?
Is this option in-the-money or out-of-the-money?
What is the Intrinsic Value of the Options?
What is the Time Value of the Options?
What is his maximum potential loss in this transaction?
What is his maximum potential gain in this transaction?
What is Vinod’s expectation of the future price of MNK stock?
If the market price of MNK stock goes up, what will happen to the price of HMT Option?
If the MNK company announces dividend of $2 per share during this period, will Vinod be
entitled for dividend?
