Part 1: Consider the following limit order book for a share of stock. The last t
ID: 2616526 • Letter: P
Question
Part 1:
Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $60.
a. If a market buy order for 200 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places.)
b. At what price would the next market buy order be filled? (Round your answer to 2 decimal places.)
Part 2:
You are bearish on Telecom and decide to sell short 100 shares at the current market price of $44 per share.
a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position?
b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.)
c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Limit Buy Orders Limit Sell Orders Price Shares Price Shares $59.75 600 $60.25 200 59.50 900 61.50 200 59.25 600 64.75 400 59.00 200 68.25 200 58.50 700Explanation / Answer
Part 1:
Logic: A market buy order will buy the shares at the lowest seller bid, if the number of shares bid for selling is sufficient. If not, the remaining shares will be purchased from the next seller bid and it will keep going unless the market buy order is fulfilled.
a) So, in the given scenario, a market buy order for 200 shares will purchase shares at $60.25, since the lowest selling bid is $60.25 and it has 200 shares.
b) The next market buy order will be filled at $61.50.
Part 2:
a) Total value of shares shorted = $44 x 100 = $4,400
Initial margin required = Value of shares shorted x Initial margin requirements
=> $4,400 x 50% = $2,200
b) Since the maintenance margin is 30%, a margin call will get initiated when price of stock appreciates by 20%. So, the price at which the margin call will get initiated will be $52.80 ($44 x 120%).
c) When you are bearish on a stock, you expect the price to go down and therefore would try to exit your position and sell off your current holding. So, here as a security dealer, I would definitely wish to decrease my inventory of this stock.