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    Chapter 3 (Compatibility Mode)

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    Alvi Kabir
    This document contains three sections that discuss different methods of calculating market averages and indices, margin requirements for stock trading, and gains and losses from short selling stocks. The first section explains price-weighted and value-weighted indices, using an example with three stocks. The second section illustrates initial and maintenance margin calculations using an example of a stock price increasing and decreasing. The third section provides an example of calculating initial margins, maintenance margins, and gains or losses from short selling a stock as its price increases or decreases.

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    Chapter 3 (Compatibility Mode)

    Uploaded by

    Alvi Kabir
    5 views2 pages
    This document contains three sections that discuss different methods of calculating market averages and indices, margin requirements for stock trading, and gains and losses from short selling stocks. The first section explains price-weighted and value-weighted indices, using an example with three stocks. The second section illustrates initial and maintenance margin calculations using an example of a stock price increasing and decreasing. The third section provides an example of calculating initial margins, maintenance margins, and gains or losses from short selling a stock as its price increases or decreases.

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    Chapter 3 [Compatibility Mode]

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    This document contains three sections that discuss different methods of calculating market averages and indices, margin requirements for stock trading, and gains and losses from short selling stocks. The first section explains price-weighted and value-weighted indices, using an example with three stocks. The second section illustrates initial and maintenance margin calculations using an example of a stock price increasing and decreasing. The third section provides an example of calculating initial margins, maintenance margins, and gains or losses from short selling a stock as its price increases or decreases.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    5 views2 pages

    Chapter 3 (Compatibility Mode)

    Uploaded by

    Alvi Kabir
    This document contains three sections that discuss different methods of calculating market averages and indices, margin requirements for stock trading, and gains and losses from short selling stocks. The first section explains price-weighted and value-weighted indices, using an example with three stocks. The second section illustrates initial and maintenance margin calculations using an example of a stock price increasing and decreasing. The third section provides an example of calculating initial margins, maintenance margins, and gains or losses from short selling a stock as its price increases or decreases.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Bases of Computing Market Averages Bases of Computing Market Averages

    An Illustration Price-Weighted Index


    • Each stock weighted by its market price.
    • Assume that “Utopia stock Exchange” consists
    of 3 stocks, namely stock A, stock B, and stock
    C. The following information pertain to these
    stock on 23 February 2005. Stock # shares Market
    outstanding Price Price-weighted
    A 150 Tk.10
    Average
    Stock # shares outstanding Market Price = 150/3
    B 200 40
    A 150 10 = 50
    C 500 100
    B 200 40
    Total 150
    C 500 100

    Bases of Computing Market Averages


    How the Margin Works
    Value-Weighted Index An Illustration
    • Each company weighted by its value (# shares X • A trader in DSE places an order to purchase 100
    Mkt.Pr.) as a percentage of the total value of the shares of ABC stock at Tk.50.00 per share. The initial
    stocks. margin requirement is 50% while the minimum
    Stock # shares Mkt. Pr. Mkt. Value Weight maintenance requirement is 25%.
    outstanding – What are the margin requirements for both initial
    A 150 10 Tk.1,500 2.52% and minimum maintenance if the price of the
    B 200 40 8,000 13.45% stock changes to (a) Tk.80.00 per share? (b)
    C 500 100 50,000 84.03% Tk.40.00 per share? © Tk.120.000?
    Total Tk.59,500 100% – What is the gain in equity to the trader if the price
    Value-weighted Index = [(10X2.52%)+(40X13.45%)+(100X84.03%)]/3 of the stock changes to (a) Tk.80.00 per share? (b)
    29.89 Tk.40.00 per share? © Tk.120.00?

    How the Margin Works How the Margin Works


    Solution Solution
    When the stock price moves to Tk.40.00
    Current Market value 100 shares @ Tk.40.00 Tk.4,000
    Purchase value 100 shares @ Tk.50 Tk.5,000
    Less Borrow Tk.5,000(1 – 0.50) 2,500
    Less Borrow Tk.5,000(1 – 0.50) 2,500 Equity (margin) Tk.1,500
    balance
    Equity (margin) Tk.2,500 Minimum Tk.4,000 X 0.25 Tk.1,000
    (Initial) Maintennce
    Replenishment Tk.2,500>Tk.1,000 Tk.0
    Gain in equity (Tk.1,500 – Tk.2,500)/Tk2,500 - 40%
    return
    Increase in price (Tk.40 – Tk.50)/Tk.50 -20%

    1
    How the Margin Works Gains and Losses on Short Sales
    Solution
    When the stock price moves to Tk.120.00 • Example:
    – A trader sold short 100 shares of XYZ stock at
    Current market 100 shares @ Tk.120 Tk.12,000 Tk.70. The initial margin requirement is 50%
    value while the minimum margin is 30% of current
    Less Borrow Tk.5,000(1 – 0.50) 2,500 price. Calculate the initial margin, maintenance
    Equity (margin) Tk.9,500 margin and gains (losses) (a) at the time of the
    balance sale (b) if the price moves to Tk.80, © if the price
    moves to Tk.85.
    Minimum Tk.12,000 X 0.25 Tk.3,000
    Maintenance (a)
    Replenishment Tk.2,500<Tk.3,000 Tk.500 Price of the stock 100 X Tk.70 Tk.7,000
    Gain in equity (Tk.9,500 – Tk.2,500)/Tk2,500 280% Initial Margin 50% X Tk. 7,000 Tk.3,500
    return
    Increase in price (Tk.120 – Tk.50)/Tk.50 140%

    Gains and Losses on Short Sales Gains and Losses on Short Sales
    (b) (c)
    Initial margin Tk.3,500
    Borrowing Tk.7,000 Initial margin Tk.3,500
    Repayment 8,000 Borrowing Tk.7,000
    Gain (loss) -Tk1,000 Repayment 8,500
    Current Margin Tk.2,500 Gain (loss) -Tk1,500
    Maintenance margin 30% X Tk.8,000 Tk.2,400 Current Margin Tk.2,000
    Replenishment Tk.2,500>Tk.2,400 0 Maintenance margin 30% X Tk.8,500 Tk.2,550
    Replenishment Tk.2,000<Tk.2,550 Tk.550

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