Lec 10 Security Analysis and Portfolio Mgmt

8/13/2019 Lec 10 Security Analysis and Portfolio Mgmt

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Margin = Equity / Value of Asset

100 shares @ Rs. 100/- = 10000/- Loan from Broker = 4000/-

Equity = 6000/-

Initial % Margin: = 6000 / 10000 = 0.6


3/12

Stock Price becomes: 70/-

Value of Asset: 70 * 100 = 7000

Loan: 4000/- Equity: 3000/-

Margin: 3000 / 7000 = 0.43

When stock value becomes 4000/-, ownersequity is Zero


4/12

Maintenance Margin:

Broker fixes a min margin requirement. Below

this threshold, he calls for more equity from

the customer.

If MM = 30%

% Margin = Equity / Asset Value = 0.3


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At what price would a broker give a margin call?

Equity: 100P4000

Value of Asset = 100P

(100P4000) / 100P = 0.3

P = 57.14

Suppose Maintenance Margin = 40%. At what pricewould the broker give a margin call?


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(100P-4000) / 100P = 0.4

P = 66.66

Why buy on Margin?

IBM = 100/- per share.Expect price to go up by 30%; Interest on Margin Loan: 9%

No dividend.

HPR = HPY = 30%

Buy at 50% Margin.

This means you are taking 10000/- loan, and investing 10000/- ownmoney.

Equity: 10000; Asset Value: 200@100/- = 20000/-

Margin: 2000010000(bm) / 20000 = 0.5


7/12

If the price reaches 130/-

Profit = {(2600010000-900)10000} / 10000

= 0.51 = 51%

If the price goes down by 30%

Profit = {(1400010000900)10000} / 1000= (310010000) / 10000

= -0.69 = 69% loss

If theres no change in prices: Loss = ________

If you borrow only 5000/-

What is the profit if the share went up by 30%

What is the loss if it goes down by 30%

40.5, -49.5


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Short Sales: Borrow shares from a broker and sell thesame before owning the share.

What is the diff between margin purchases and shortsales?

Dot Bomb Share: 100/-

You feel that it is overvalued and are shorting it by selling1000 shares. Broker has a margin requirement on

short sale of 50%This means you need to have 50000/- equity in your

account.


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Assets:

Cash: 100000/-

Bonds: 50000/-

LiabilitiesShort Position: 100000/-

Equity 50000/-

% Margin: Equity / Asset Value50000 / 100000

= 0.50


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Price goes down by 30%

Value of share: 70/-

Close the short position at a profit

Buy 1000 shares from the market and give to broker.

Cost = 70000/- Profit = 30000/-

Price goes up by 30%

Value of share: 130/-

Broker has a MM of 30% on short sales.MM = Equity / Asset Value = 0.3

Will you get a margin Call? At what price will that happen?


11/12

Equity = 150000Value of share

= 1500001000P

Asset Value = 1000P

(1500001000P) / 1000P = 0.3

P = 115.38

If Short Margin is 40%, how far the price can risebefore you get a margin call?


12/12

Equity / Asset Value = 0.4

( 1500001000P) / 1000P = 0.4P = 107.14

Lec 10 Security Analysis and Portfolio Mgmt

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