10.
a. In principle, potential losses are unbounded, growing directly with increases in the price of IBM.
b. If the stop-buy order can be filled at $128, the maximum possible loss per share is $8. If the price of IBM shares go above $128, then the stop-buy order would be executed, limiting the losses from the short sale.
12
a. In addition to the explicit fees of $60,000, DRK appears to have paid an implicit price in underpricing of the IPO. The underpricing is $4 per share, or a total of $400,000, implying total costs of $460,000.
b. No. The underwriters do not capture the part of the costs corresponding to the underpricing. The underpricing may be a rational marketing strategy. Without it, the underwriters would need to spend more resources in order to place the issue with the public. The underwriters would then need to charge higher explicit fees to the issuing firm. The issuing firm may be just as well off paying the implicit issuance cost represented by the underpricing.
13
a. The stock is purchased for: 300 x $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b. If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 x 1.08 = $4,320
Therefore, the remaining margin in the investor’s account is:
$9,000 - $4,320 = $4,680
The percentage margin is now: $4,680/$9,000 = 0.52 = 52%
Therefore, the investor will not receive a margin call.
c. The rate of return on the investment over the year is:
(Ending equity in the account - Initial equity)/Initial equity
= ($4,680 - $8,000)/$8,000 = - 0.415=-41.5%
15
a. The buy order will be filled at the best limit-sell order price: $50.25
b. The next market buy order will be filled at the next-best limit-sell order price: $51.50
c. You would want to increase your inventory. There is...