Week 1
Investment Overview &
Trading Securities
FINS5513
1.1A Price Weighted Index (PWI)
Consider a market consisting of the following 4 stocks over 2 periods:
Period GS KO APPL JNJ
Period 1 $370 $55 $135 $160
Period 2 $350 $45 $140 $165
Calculate the Price Weighted Index (PWI) for period 1 and 2 respectively. Calculate the change
in the PWI between period 1 and 2.
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
Step #1: PWI in Period 1: 𝑃𝑊𝐼 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
(370+55+135+160)
𝑃𝑊𝐼 = = 𝟏𝟖𝟎. 𝟎𝟎
4
(350+45+140+165)
Step #2: PWI in Period 2: 𝑃𝑊𝐼 = = 𝟏𝟕𝟓. 𝟎𝟎
4
175 (175−180)
Change between period 1 and 2: − 1 = −𝟐. 𝟕𝟖% or = −𝟐. 𝟕𝟖%
180 180
2
1.1B PWI: Changing the Divisor - Index Change
Suppose Coca-Cola (KO) were replaced in the index by Microsoft (MSFT) as shown. The prices
of all stocks before and after the change are shown (prices remain constant).
Period GS KO MSFT APPL JNJ
Pre-change prices $370 $55 N/A $135 $160
Post-change prices $370 N/A $280 $135 $160
Calculate the revised divisor and verify the PWI remains the same after the change.
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
Step #1: PWI in Period 1: 𝑃𝑊𝐼 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
(370+55+135+160)
𝑃𝑊𝐼 = = 180.00
4
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑎𝑓𝑡𝑒𝑟 𝑡ℎ𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
Step #2: Revised divisor: 𝑑 =
𝑃𝑊𝐼 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
(370+280+135+160)
𝑑= = 𝟓. 𝟐𝟓
180
3
1.1B PWI: Changing the Divisor - Index Change
Step #3: Verify the revised divisor gives the same PWI as before the change:
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑎𝑓𝑡𝑒𝑟 𝑐ℎ𝑎𝑛𝑔𝑒
𝑃𝑊𝐼 =
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐷𝑖𝑣𝑖𝑠𝑜𝑟
(370+280+135+160)
𝑃𝑊𝐼 = = 𝟏𝟖𝟎. 𝟎𝟎
5.25
4
1.1B PWI: Changing the Divisor - Stock Split
Consider a market consisting of the following 4 stocks:
Period GS KO APPL JNJ
Pre-stock split prices $370 $55 $135 $160
Suppose GS undertook a 10:1 stock split. Calculate the revised divisor and verify the PWI
remains the same after the change.
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
Step #1: PWI: 𝑃𝑊𝐼 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥
(370+55+135+160)
𝑃𝑊𝐼 = = 180.00
4
370
Step #2: Calculate GS post stock split price: = $37
10
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑎𝑓𝑡𝑒𝑟 𝑡ℎ𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
Step #3: Revised divisor: 𝑑 =
𝑃𝑊𝐼 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
(37+55+135+160)
𝑑= = 𝟐. 𝟏𝟓
180 5
1.1B PWI: Changing the Divisor - Stock Split
Step #4: Verify the revised divisor gives the same PWI as before the change:
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑎𝑓𝑡𝑒𝑟 𝑐ℎ𝑎𝑛𝑔𝑒
𝑃𝑊𝐼 =
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐷𝑖𝑣𝑖𝑠𝑜𝑟
(37+55+135+160)
𝑃𝑊𝐼 = = 𝟏𝟖𝟎. 𝟎𝟎
2.15
6
1.1C Value Weighted Index (VWI)
Consider a market consisting of the following 4 stocks over 2 periods. The prices and number of
shares on issue of each of the stocks is shown:
Period GS KO APPL JNJ
Period 1 $370 $55 $135 $160
Period 2 $350 $45 $140 $165
# shares (millions) 340 4,300 16,700 2,630
If the Value Weighted Index (VWI) for period 1 is 4000, calculate the VWI for period 2. Calculate
the change in the VWI between period 1 and 2 and compare this to the PWI change in 1.1A.
Step #1: Total market capitalisation in period 1: GS: 370 × 340 = 125,800 +
KO: 55 × 4,300 = 236,500 +
APPL: 135 × 16,700 = 2,254,500 +
JNJ: 160 × 2,630 = 420,800
Total market capitalization in the index period 1: = 3,037,600
7
1.1C Value Weighted Index (VWI)
Step #2: Total market capitalisation in period 2: GS: 350 × 340 = 119,000 +
KO: 45 × 4,300 = 193,500 +
APPL: 140 × 16,700 = 2,338,000 +
JNJ: 165 × 2,630 = 433,950
Total market capitalisation in the index period 2: = 3,084,450
Step #3: VWI in Period 2:
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑖𝑛 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑉𝑊𝐼𝑡 = 𝑉𝑊𝐼𝑡−1 × 𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑖𝑛𝑐𝑙𝑢𝑑𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 − 1
3,084,450
𝑉𝑊𝐼 = 4,000 × = 𝟒, 𝟎𝟔𝟏. 𝟕
3,037,600
4,061.7
Change between period 1 and 2: − 1 = +𝟏. 𝟓𝟒%
4,000
For the same price change over two periods, the PWI falls -2.78%, while the VWI rises +1.54%.
This is because the rise in the price of APPL and JNJ has a much larger impact than the fall in
price of GS and KO – because APPL and JNJ are much larger in size. In a PWI, smaller
companies can have more of an impact, compared to a VWI 8
1.2A Spreads and Commissions (Buy)
Using the information below, calculate the transaction costs (accounting for the spread where
relevant) and net proceeds paid for a) a limit buy order and b) a market buy order.
Buyer
Bid-Ask $52.00 - $52.50
# of Shares 0.5 million
Commission 0.20%
Limit order $52.00
Step #1: Proceeds paid for a limit order at $52.00:
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑃𝑎𝑖𝑑 𝐵𝑢𝑦 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 × 1 + 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑃𝑎𝑖𝑑 𝐵𝑢𝑦 = $52.00 × 500,000 × 1.002 = $𝟐𝟔, 𝟎𝟓𝟐, 𝟎𝟎𝟎
Step #2: Transaction cost for a limit order at $52.00:
𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝐵𝑢𝑦 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 × 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 + 𝑆𝑝𝑟𝑒𝑎𝑑 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 9
1.2A Spreads and Commissions (Buy)
𝑆𝑝𝑟𝑒𝑎𝑑 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝐵𝑖𝑑 = $52.00 − $52.00 = 0
Therefore: 𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝐵𝑢𝑦 = $52.00 × 0.002 + 0 × 500,000 = $𝟓𝟐, 𝟎𝟎𝟎
Step #3: Proceeds paid for a market order:
With a market order, the buyer purchases at the ask price of $52.50
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑃𝑎𝑖𝑑 𝐵𝑢𝑦 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 × 1 + 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑃𝑎𝑖𝑑 𝐵𝑢𝑦 = $52.50 × 500,000 × 1.002 = $𝟐𝟔, 𝟑𝟎𝟐, 𝟓𝟎𝟎
Step #4: Transaction cost for a market order:
𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝐵𝑢𝑦 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 × 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 + 𝑆𝑝𝑟𝑒𝑎𝑑 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑
𝑆𝑝𝑟𝑒𝑎𝑑 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝐵𝑖𝑑 = $52.50 − $52.00 = $0.50
Therefore: 𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝐵𝑢𝑦 = $52.50 × 0.002 + $0.50 × 500,000 = $𝟑𝟎𝟐, 𝟓𝟎𝟎
10
1.2B Spreads and Commissions (Sell)
Using the information below, calculate the transaction costs (accounting for the spread where
relevant) and net proceeds received for a) a limit sell order and b) a market sell order.
Seller
Bid-Ask $32.70 - $33.00
# of Shares 2 million
Commission 0.15%
Limit order $33.00
Step #1: Proceeds received for a limit order at $33.00:
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑆𝑒𝑙𝑙 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 × 1 − 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑆𝑒𝑙𝑙 = $33.00 × 2,000,000 × 0.9985 = $𝟔𝟓, 𝟗𝟎𝟏, 𝟎𝟎𝟎
Step #2: Transaction cost for a limit order at $33.00:
𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑆𝑒𝑙𝑙 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 × 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 + 𝑆𝑝𝑟𝑒𝑎𝑑 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 11
1.2B Spreads and Commissions (Sell)
𝑆𝑝𝑟𝑒𝑎𝑑 = 𝐴𝑠𝑘 − 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 = $33.00 − $33.00 = 0
Therefore: 𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑆𝑒𝑙𝑙 = $33.00 × 0.0015 + 0 × 2,000,000 = $𝟗𝟗, 𝟎𝟎𝟎
Step #3: Proceeds received for a market order:
With a market order, the seller sells at the bid price of $32.70
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑆𝑒𝑙𝑙 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 × 1 − 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑃𝑎𝑖𝑑 𝑆𝑒𝑙𝑙 = $32.70 × 2,000,000 × 0.9985 = $𝟔𝟓, 𝟑𝟎𝟏, 𝟗𝟎𝟎
Step #4: Transaction cost for a market order:
𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑆𝑒𝑙𝑙 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 × 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 + 𝑆𝑝𝑟𝑒𝑎𝑑 × #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑
𝑆𝑝𝑟𝑒𝑎𝑑 = 𝐴𝑠𝑘 − 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 = $33.00 − $32.70 = $0.30
Therefore: 𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑆𝑒𝑙𝑙 = $32.70 × 0.0015 + $0.30 × 2,000,000 = $𝟔𝟗𝟖, 𝟏𝟎𝟎
12
1.3A Buying on Margin - Initial Setup
ABC Fund wishes to buy 5 million shares of Pfizer (PFE), currently trading at $40. It purchases
them through a margin loan from XYZ Brokers on the following margin terms. Calculate the initial
margin and margin loan amount:
Initial Margin 50%
Maintenance Margin 30%
PFE purchase price $40
Shares Purchased 5 million
Following ABC Fund’s purchase, the share price falls. Determine if there is a margin call at $35?
At $25? If there is a margin call, how much additional margin (collateral) needs to be posted?
Step #1: Initial setup – calculate share portfolio value (SPV) first (always):
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑃𝑉 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 × 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐 e = 5 × 40 = $200 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 % × 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑃𝑉 = 50% × 200 = $𝟏𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑜𝑎𝑛 = (1 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 %) × 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑃𝑉 = 1 − 50% × 200 = $𝟏𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 13
1.3A Buying on Margin - Margin Call
Step #3: Share portfolio value (SPV) at $35 (always calculate first when share price changes)
𝑆𝑃𝑉 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 = 5 × 35 = $175 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Step #4: Calculate margin %: 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑃𝑉 − 𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑜𝑎𝑛 = 175 − 100 = $75 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑀𝑎𝑟𝑔𝑖𝑛 % = 𝑀𝑎𝑟𝑔𝑖𝑛 ÷ 𝑆𝑃𝑉 = 75 ÷ 175 = 42.8%
As margin % = 42.8% > Maintenance Margin = 30% → No margin call
Step #3 repeat: Share portfolio value (SPV) at $25 (always calculate first)
𝑆𝑃𝑉 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 = 5 × 25 = $125 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Step #4 repeat: Calculate margin %: 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑃𝑉 − 𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑜𝑎𝑛 = 125 − 100 = $25 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑀𝑎𝑟𝑔𝑖𝑛 % = 𝑀𝑎𝑟𝑔𝑖𝑛 ÷ 𝑆𝑃𝑉 = 25 ÷ 125 = 20%
As margin % = 20% < Maintenance Margin = 30% → Margin call
Step #5: Additional collateral: 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 = 𝑆𝑃𝑉 × 𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑐𝑒 𝑀𝑎𝑟𝑔𝑖𝑛 % − 𝑀𝑎𝑟𝑔𝑖𝑛
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 = 125 × 30% − 25 = $𝟏𝟐. 𝟓 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 14
1.3A Buying on Margin - Margin Call
New Position (post additional collateral):
Share Portfolio Value 25 x 5 = $125 million
Margin Loan 100 – 12.5 = $87.5 million
Equity/Margin: 125 – 87.5 = $37.5 million
Equity/Margin % = 37.5/125.0 = 30%
This is FYI only as it wasn’t asked in the question.
15
1.3B Buying on Margin – Margin Call Price
Referring to 1.3A, how far can the share price fall before there is a margin call?
If the price at which there is a margin call is instead $26.67, what is the implied maintenance
margin?
Step #1: Use P* formula to calculate margin call price:
𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑜𝑎𝑛
𝑃∗ =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 1 −𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑀𝑎𝑟𝑔𝑖𝑛%
100
𝑃∗ = = $𝟐𝟖. 𝟓𝟕
5 × 1−0.3
Step #2: Since P* is given, use this in the formula to solve for the implied maintenance margin %
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝑃∗ − 𝑀𝑎𝑟𝑔𝑖𝑛 𝐿𝑜𝑎𝑛
Maintenance Margin % =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝑃∗
5 ×26.67 −100
Maintenance Margin % = = 𝟐𝟓%
5 ×26.67
16
1.3C Selling on Margin - Initial Setup
ABC Fund wishes to short 5 million shares of Coca-Cola (KO), currently trading at $60. It short
sells them on margin from XYZ Brokers on the following terms. Calculate the Initial Account
Balance (IAB):
Initial Margin 50%
Maintenance Margin 30%
KO sale price $60
Shares Sold Short 5 million
Following ABC’s KO short sale, the share price rises. Determine if there is a margin call at $65?
At $75? If there is a margin call, how much additional margin (collateral) needs to be posted?
Step #1: Initial setup – calculate initial sale proceeds first (always):
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑎𝑙𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 × 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐e = 5 × 60 = $300 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 % × 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑎𝑙𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 50% × 300 = $150 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑎𝑙𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 = 300 + 150 = $𝟒𝟓𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 17
1.3C Selling on Margin - Margin Call
Step #3: Share portfolio value (SPV) at $65 (always calculate first when share price changes)
𝑆𝑃𝑉 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 = 5 × 65 = $325 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Step #4: Calculate margin %: 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐼𝐴𝐵 − 𝑆𝑃𝑉 = 450 − 325 = $125 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑀𝑎𝑟𝑔𝑖𝑛 % = 𝑀𝑎𝑟𝑔𝑖𝑛 ÷ 𝑆𝑃𝑉 = 125 ÷ 325 = 38.5%
As margin % = 38.5% > Maintenance Margin = 30% → No margin call
Step #3 repeat: Share portfolio value (SPV) at $75 (always calculate first)
𝑆𝑃𝑉 = #𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 = 5 × 75 = $375 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Step #4 repeat: Calculate margin %: 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐼𝐴𝐵 − 𝑆𝑃𝑉 = 450 − 375 = $75 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑀𝑎𝑟𝑔𝑖𝑛 % = 𝑀𝑎𝑟𝑔𝑖𝑛 ÷ 𝑆𝑃𝑉 = 75 ÷ 375 = 20%
As margin % = 20% < Maintenance Margin = 30% → Margin call
Step #5: Additional collateral: 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 = 𝑆𝑃𝑉 × 𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑀𝑎𝑟𝑔𝑖𝑛 % − 𝑀𝑎𝑟𝑔𝑖𝑛
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 = 375 × 30% − 75 = $𝟑𝟕. 𝟓 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 18
1.3C Selling on Margin - Margin Call
New Position (post additional collateral):
Share Portfolio Value 75 x 5 = $375 million
Equity/Margin: 75 + 37.5 = $112.5 million
Equity/Margin % = 112.5 / 375 = 30%
This is FYI only as it wasn’t asked in the question.
19
1.3D Selling on Margin – Margin Call Price
Referring to 1.3C, how far can the share price rise before there is a margin call?
If the price at which there is a margin call is instead $72.00, what is the implied maintenance
margin?
Step #1: Use P* formula to calculate margin call price:
𝐼𝐴𝐵
𝑃∗ =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 1+𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑀𝑎𝑟𝑔𝑖𝑛%
450
𝑃∗ = = $𝟔𝟗. 𝟐𝟑
5 × 1+0.3
Step #2: Since P* is given, use this in the formula to solve for the implied maintenance margin %
𝐼𝐴𝐵 − 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝑃∗
Maintenance Margin % =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝑃∗
450 − 5 ×72
Maintenance Margin % = = 𝟐𝟓%
5 ×72
20
1.4A Mutual Fund NAV and Returns
Sharepoint Fund had the following financials at the beginning and end of the year:
Millions Beginning of Year End of Year
Assets $452.8 $495.6
Liabilities (before management fees) $4.5 $4.7
Units Outstanding 90 97
a) Assuming management fees are 0.80% of NAV (liabilities exclude management fees owing),
calculate the management fee at the beginning and end of year.
b) Calculate NAV per unit at the beginning and end of year (liabilities include management fees
owing)
c) Sharepoint fund makes an income distribution of 22 cents per unit and a capital gain
distribution of 7 cents per unit. Calculate an investor’s 1 year return in the fund,if they bought
in and sold out at NAV.
21
1.4A Mutual Fund NAV and Returns
a) Step #1: Calculate management fees owing (liabilities exclude management fees owing):
𝑁𝐴𝑉 = 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝑁𝐴𝑉 × 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 %
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑌𝑒𝑎𝑟 𝐹𝑒𝑒 𝑂𝑤𝑖𝑛𝑔 = 452.8 − 4.5 × 0.008 = $𝟑. 𝟔 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
𝐸𝑛𝑑 𝑜𝑓 𝑌𝑒𝑎𝑟 𝐹𝑒𝑒 𝑂𝑤𝑖𝑛𝑔 = 495.6 − 4.7 × 0.008 = $𝟑. 𝟗 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
b) Step #2: Beginning/end year NAV per unit (liabilities include management fees owing):
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 −𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝐴𝑉 =
𝑈𝑛𝑖𝑡𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
452.8−4.5 −3.6 495.6−4.7 −3.9
𝑁𝐴𝑉0 = = $𝟒. 𝟗𝟒 𝑁𝐴𝑉1 = = $𝟓. 𝟎𝟐
90 97
c) Step #3: Calculate returns
𝑁𝐴𝑉1 −𝑁𝐴𝑉0 +𝐼𝑛𝑐𝑜𝑚𝑒+𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐺𝑎𝑖𝑛
𝑅𝑒𝑡𝑢𝑟𝑛 =
𝑁𝐴𝑉0
5.02−4.94+0.22+0.07
𝑅𝑒𝑡𝑢𝑟𝑛 = = 𝟕. 𝟒𝟗% 22
4.94