...Margin Call J.C. Chandler’s 2011 film Margin Call examines the actions of an investment firm’s key decision makers during the earliest stages of the most recent financial crisis. Chandler does a good job with the characters of this movie he isn’t necessarily looking for a villain in a mess like this nor any lengthy explanations; he’s going deeper than that. He goes more for societal costs of high finance, the power of self-rationalization, and the easy embrace of personal corruption. The movie is filled with business lessons that go beyond the investment world. One theme of the film centers on business ethics and whether personal interest should trump customer/employee investment. Clearly, the decision made by John Tuld and senior management demonstrates that everybody is out for themselves. Personal investors are at the mercy of the individuals and the firms they invest with. The ease with which Tuld makes his decisions is scary to any business ethical viewer. With unqualified statements such as, “its just money” the audience begins to understand that the financial system can be an unfair game. In contrast Peter’s boss, Sam Rogers’ ethical implications of how the company plans to resolve its problems are almost more than he can handle. Sam stumbles upon the issue triggering the crisis, it’s one thing to be shocked at the ramifications of what’s about to unfold. But it doesn’t mean one’s outrage can’t be set aside when personal survival is on the line, an attitude...
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...Margin Call Margin call is an independent drama film of a investment bank firm that takes place over a 36 hour period after discovering a huge financial crisis that is about to occur. Each character takes part in a story that shows their emotions and actions of how to handle an economic downturn. In the beginning of the movie, many of the employees are being laid off and that includes Head Risk Manager, Eric Dale. Before he leaves, he hands Junior Risk Analyst, Peter Sullivan, a USB of his project he has been working on and tells him to “be careful”. Peter later continues on the project that Eric Dale hasn’t completed and then reaches a conclusion that is very problemental to the firm and economy. The mortgage-backed securities which they possess are losing value which will be detrimental to the firm. Peter cannot reach Dale so instead contacts, Seth, Junior Risk Analyst, and Will, Head of Trading, to take a look at his outcome. Soon, this problem is discovered and all the head of the company, including Chief Executive Officer, John Tuld, is forced to have a meeting at 3 in the morning to discuss what actions should be taken. They are conflicted on a solution to save the company but need to do whatever it takes. After a discussion, they then reach a conclusion to sell off toxic securities before the news spreads of their worthlessness. The market opens and they are capable of selling the assets at a discounted price even though many clients are suspicious and will...
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...I was told to behave ethically when I was young. I thought being ethically was pretty easy. Because all I need to do is to do right thing. At that time, doing the right things means to help others, not tell lies to others, and protect the environment…there’s not an obscure definition of doing the right thing. However, as being a college student who will be graduating and entering the society, I found not that I’m not sure how to do the right things, sometimes I don’t even know what the right thing is. The movie Margin Call is a good example of an ethical dilemma that we may face when we enter the real world. We can see that different characters have different perceptions of what is right to them. The whole movie was based on the true stories in Wall Street back in 2008. Contrast to other financial crisis movies, the movie Margin Call particularly emphasis on the describing the brutal competition and the ruthlessness of people when facing the possible financial crisis. The character that resonates with me the most is Sam Rogers, I think I can feel what he feels because he is definitely the one who is struggling thorough out the story. I think he is just one of us, he is just a normal man. When we facing ethical dilemmas, we are definitely not the ones who stand out and choose to do the right thing immediately. We always have to fight with ourselves. Which choice is better for my own profits? Which choice would be the right? Do I suffer losses by making the right choice? Those...
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...borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6% and is paid at the end of the year. A) What is percentage increase in the net worth of your brokerage account if the price of the stock immediately changes to: (i) $18; (ii) $20; (iii) $22? i. -20% ii. 0% iii. 20% B) If the maintenance margin is 30%, how low can ABC’s stock price fall before you get a margin call? 10000/.7=14286/1000 = $14.29/Share C) What is the rate of return on your margined position if the stock is selling after one year at: (i) $18; (ii) $20; (iii) $22? Assume that the stock pays no dividend. i. -26% ii. -6% iii. 14% D) Continue to assume that a year has passed. How low can the price fall before you get a margin call? 10600/.7=15142/1000= $15.14/Share Question 2: Suppose that you sell short 1,000 shares of XYZ stock, currently selling for $20 per share, and give your broker $10,000 to establish your margin account. A) If you earn no interest on the funds in your account, what will be your rate of return after one year if the stock is selling at: (i) $18; (ii) $20; (iii) $22? Assume that the stock pays no dividend. i. 20% ii. 0% iii. -20% B) If the maintenance margin is 30%, how high can the stock price rise before you get a margin call? (30000-1000P)/1000P=.3 P= $23.08/Share C) Redo part (A) and...
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...FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Jackie has a margin account with a balance of $150,000. If the initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share: (a) 1 How many shares of Turtle can Jackie purchase? (b) 2 What is Jackie's profit/loss if Turtle’s price after one year is $40? (d) 3 If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Heidi Talbott has a margin account with a balance of $50,000. If the initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share. (b) 4 How many shares of RC can Heidi buy? (c) 5 What is Heidi’s profit if RC’s price rises to $80? (d) 6 If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Kathy Smith has a margin account with a balance of $60,000. If initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share. (a) 7 How many shares of Jackson can Kathy buy? (a) 8 What is Kathy's profit if Jackson’s price rises to $50? (c) 9 If the maintenance margin is 25 percent, to what price can Jackson Industries fall before Kathy receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS You...
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...(value of stocks - amount borrowed - interest payment - initial investment) / initial investment = 11,000 - 5,000 - 400 - 5,000 / 5,000 = 600 / 5,000 = 0.12 = 12% B) How far can the price drops (immediately) if the maintenance margin is 30%: Value of shares is 200P, equity is 200P - 5,000 so 0.30 60P = (200P - 5,000)/ 200P = 200P - 5,000 140P = 5,000 P = 35.7143 So the price can drop up to 38.57 per share before I get a margin call. 2) Short sell 500 shares and each has a current price of $40 so the value of the stocks for short selling is 500 x 40 = 20,000. 15,000 dollars is given to the broker for the margin account. A) Assume there is no dividend, no interest. The rate of return after a year will be calculated by (Price obtained from short sale - price paid to buy stocks) / initial investment (i) If the price is $44: (20,000 - 22,000) / 15,000 = -13.33% (ii) If the price is $40: (20,000 - 20,000) / 15,000 = 0% (iii) If the price is $36: (20,000 - 18,000) / 15,000 = 13.33% B) If the maintenance margin is 25%, the price can rise up to: Value of the shares is 500P Equity of the shares is 35,000 - 500P 0.25 = (35,000 - 500P) / 500P 125P = 35,000 - 500P 625P = 35,000 P = 56 So the price can go up to 56 dollars before I get a margin call from the broker. C) Suppose that the dividend for each share is $1, so the dividend at year end will be 500 x 1 = 500 dollars. The rate of return in part (A) will be: (Price obtained from short sale - dividend - price paid to buy...
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...of XYZ common stock on margin at $50 per share from your broker. If the initial margin is 65%, how much did you borrow from the broker, what is the margin? 2. You purchase 100 shares at $60 per share and margin = 50%. Suppose stock rises to $80/sh (increase of 33%). What is your return? Suppose stock drops to $40/sh (decrease of 33%). What is your return? 3. Investor opens a brokerage account and purchases 300 shares of XYZ at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Investors account when she first purchases the stock? b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? c. What is the rate of return on her investment? 4. Suppose you buy 1000 shares of XYZ at $70. You make full use of the initial margin, which is 50%. The maintenance margin is 40%. If the stock price drops to $60, will you receive a margin call? How about 55$? 5. You sell 100 short shares of stock at $60 per share. Initial Margin is 50%. What is your return if the price falls to $50/sh next period? What if it rises to $70? 6. Investor opened an account to short-sell 1,000 shares of XYZ at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of XYZ has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is the remaining margin in the account? b. What...
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...of XYZ common stock on margin at $50 per share from your broker. If the initial margin is 65%, how much did you borrow from the broker, what is the margin? 2. You purchase 100 shares at $60 per share and margin = 50%. Suppose stock rises to $80/sh (increase of 33%). What is your return? Suppose stock drops to $40/sh (decrease of 33%). What is your return? 3. Investor opens a brokerage account and purchases 300 shares of XYZ at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Investors account when she first purchases the stock? b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? c. What is the rate of return on her investment? 4. Suppose you buy 1000 shares of XYZ at $70. You make full use of the initial margin, which is 50%. The maintenance margin is 40%. If the stock price drops to $60, will you receive a margin call? How about 55$? 5. You sell 100 short shares of stock at $60 per share. Initial Margin is 50%. What is your return if the price falls to $50/sh next period? What if it rises to $70? 6. Investor opened an account to short-sell 1,000 shares of XYZ at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of XYZ has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is the remaining margin in the account? b. What...
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...FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #1 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams, practice sets with solutions will be handed out. These sets contain select worked-out end-of-chapter problems from BKM4 through BKM6. These sets will not be graded, but students are strongly encouraged to try hard to solve them and to use office hours to discuss any problems they may have doing so. One of the best self-tests for a student of his or her command of the material before a case or the exam is whether he or she can handle the questions of the relevant practice sets. The questions on the exam will cover the reading material, and will be very similar to those in the practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold certificates primitive or derivative securities? (b) Is the issue being described a primary or secondary market transaction? Question 3. Suppose that you are an executive of General Motors (GM), and that a large share of your potential income is derived from year-end bonuses that depend on GM’s annual profits. (c) Would the...
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...FINA2320/2802DE Fall 2015: Homework #1 Solutions 1. Buying on margin case: (a) The initial value of stock is $75 × 1000 = $75,000. So investor should using invest: Equity in account = $75,000 × Initial Margin = $75,000 × 50% = $37,500 And investor should borrow from the broker: Liability = $75,000 - 37,500 = $37,500 The initial balance sheet looks like this: Assets Liabilities and Owner’s Equity Value of stock $75,000 Loan from broker $37,500 Equity $37,500 (b) (i) If the stock price goes up by 10%, the total value of stock is $75 × (1 + 10%) × 1000 = $82,500 The liability is $37,500 × (1 + 6%) = $39,750. Therefore, the equity in account is $82,500 - $39,750 = $42,750. The balance sheet one year later is: Assets Liabilities and Owner’s Equity Value of stock $82,500 Loan from broker $39,750 Equity $42,750 The dividend payment that the investor received during holding period is $2.5 × 1000 = $2,500. So investor’s holding period return is HPR = ($42,750 - 37,500 + 2,500) / $37,500 = 20.67% (ii) If year-end ex-dividend price of stock does not change, the total value of stock is $75,000. The liability is $39,750. Therefore, the equity in account is $75,000 - $39,750 = $35,250. So investor’s holding period return is HPR = ($35,250 - 37,500 + 2,500) / $37,500 = 0.67% (iii) If year-end ex-dividend price of stock goes down by 10%, the total value of stock is $75 × (1 - 10%) × 1000 = $67,500 The liability is $39,750. Therefore, the equity in account...
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...marking-to-market or the process of updating a traders margin accounts to account for gains or losses incurred over the trading day is __________. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (A) | protect the clearing house (guarantor) insuring traders fulfill agreements | (B) | to help fund clearing house operations via interest earned on margin accounts | (C) | to create a mechanism of matching buyers to sellers | (D) | to create a mechanism that allows the exchange to observe price movements | (E) | both (A) and (B) | Q4 Another name for a margin is ________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (A) | division | (B) | performance bond | (C) | clearing bond | (D) | sufficiency guarantee | (E) | none of the above | | Question 5 | | | | | | | | | | | | | If a trader is "short" in the market and the price of the futures contract decreases then the trader __________. | | | | | | | | | | | | | | | | Answers | | | | | | | | | | | | | | (A) | losses money | | (B) | gains money | | (C) | will not know if they have gained or lost money until the contract expires | | (D) | will receive a margin call from their broker | | (E) | will receive a margin call from the clearing house | Question 6 | | | | | | | | | | | | | Margins are typically changed | | | | | | | | | | |...
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...profit of $5000 on 200 shares sold short at $75, the investor must coverat (ignoring transaction costs) 200($75) = $15,000- X ─────── = $ 5000 profit X is $10,000, which must be divided by 200 shares ANSWER: $50 per share For a profit of $1000, the calculation is $15,000- X ─────── $ 1000 X is $14,000, which again must be divided by 200 shares ANSWER: $70 per share 5-3. 100 shares at $50 per share is a total cost of $5000. At 50% margin, the investor must put up $2500, resulting in a gross profit percentage relative to equity of $1000/$2500 = 40% At 40% margin, the investor must put up $2000, resulting in a gross profit percentage relative to equity of $1000/$2000 = 50% At 60% margin, the investor must put up $3000, resulting in a gross profit percentagerelative to equity of $1000/$3000 = 33.3% 5-4. The initial margin is 50% of $6000, or $3000. The other $3000 is borrowed from the broker .(a) market value of securities - amount borrowed actual margin = ─────────────────────────────── market value of securities $5000 - $3000 = ─────────────...
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...c3c3 Student: ___________________________________________________________________________ 1. A purchase of a new issue of stock takes place A. in the secondary market. B. in the primary market. C. usually with the assistance of an investment banker or dealer. D. a and c. E. b and c. 2. The trading of stock that was previously issued takes place A. in the secondary market. B. in the primary market. C. usually with the assistance of an investment banker. D. a and c. E. b and c. 3. Which of the following statement(s) is (are) true? A. Option volume on the TSX is greater than that on the ME. B. Share volume of TSX trades are greater than that of the ME. C. The TSX is the only stock exchange that is national in scope. D. a and b. E. b and c. 4. The following statements regarding the specialist are true: A. Specialists maintain a book listing outstanding unexecuted limit orders. B. Specialists earn income from commissions and spreads in stock prices. C. Specialists stand ready to trade at quoted bid and ask prices. D. Specialists cannot trade in their own accounts. E. a, b, and c are all true. 5. Investment bankers A. act as intermediaries between issuers of stocks and investors. B. act as advisors to companies in helping them analyze their financial needs and find buyers for newly issued securities. C. accept deposits from savers and lend them out to companies. D. a and b. E. a, b, and c. 6. In a "best-efforts" basis A. the investment...
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...Homework 1: Part 1: H Partners and Six Flags Case Study. Following questions are based on the case study. 1. Briefly describe the reasons for Six Flag’s deteriorating performance. Do you believe the core business is sound? (Note-I am not looking for a very long answer. The reasons for bankruptcy will play a big role in your decision to invest or not invest in a company. For instance: a business cycle downturn vs new research that shows company’s products are harmful for people (think asbestos)) Due to the volatile state of Six Flags between 2003 and 2009, one could conclude that Six Flag’s business model was not financially sound. In looking at comparable firms such as Disney or Universal Studios, the amusement parks are not their only component in their business model. In addition to being poorly diversified, Six Flags sold tickets at steep discounts and heavy promotions, which drove the average ticket price to $21.10 in 2008. Unlike their competitors, the parks are marketed to consumers within 100 miles of the park. Firms like Disney and Universal have both domestic and international tourists, the majority of which come from more than 100 miles away. This leaves Six Flags with limited same-park growth because they are limited to the population within driving distance to the park. Furthermore, an unfortunate sequence of events hit the company in 2009. The outbreak of the H1N1 (swine flu virus) caused the Mexico City park to shut down and negatively impacted...
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...American Finance Association Limited Arbitrage in Equity Markets Author(s): Mark Mitchell, Todd Pulvino, Erik Stafford Source: The Journal of Finance, Vol. 57, No. 2 (Apr., 2002), pp. 551-584 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2697750 Accessed: 08/01/2010 15:26 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Blackwell Publishing and American Finance Association...
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