After inheriting $40,000 you open up two separate brokerage accounts and divide your inheritance equally in both accounts ($20,000 in each). You use only these funds to trade in two stocks for two months at the end of which you clear both your positions and evaluate your performance. Assume the following:
- You pay $10 per transaction (use only your inheritance as source of funds)
- Call money rate is 4.5% (APR compounded daily - 365 days a year)
- Initial margin is 50% and maintenance margin is 30%. Use maximum initial margin based on the number of ‘whole' shares you can get.
- Only your equity funds in the short arrangement earn interest.
On 7/1/09 you did the following:
1. Buy stock ABC for $250 (account 1) and short stock XYZ for $30 (account 2) so that your overall initial margin is 50% in each of the two accounts. Provide the following information:
(i) Number of shares bought/sold for each stock.
(ii) Amount of money borrowed for the margin trade in each account.
(iii) For each account, at what price will you receive a margin call?
2. At the end of the two months when you get out of each position both stocks are selling for $50. You evaluate your performance by computing the following:
i. The holding period return of each account,
ii. The annualized holding period return of each account.
iii. The holding period return of the combined portfolio.
3. Assume that during the quarter, dividends equal to 0.2% of your market purchase price of each of the stock in your portfolio were paid out.