Holding period return using leverage versus paying for BST

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Reference no: EM131938629

1. Alicia purchased a put option for $500. The option expired on August 19, 2016. What should Alicia report on her 2016 return?

$500 of investment expense.

$500 of capital gain.

$500 of capital loss.

No gain, loss, or expense related to this transaction.

2. Gordon Gekko purchased 21m shares of BlueStar (BST) through share & option transactions facilitated by Jackson & Steinham at an average price of $24.25 per share. His broker Bud Fox ‘hangs him out in the wind to twist’ by selling BST to Sir Larry Wildman for only $16.40 a share! If Gekko & Co. paid only 45% of the initial purchase price in cash, and borrowed the rest on margin (ignoring 2% principal leverage fees & 0.25% trading fees otherwise paid to Jackson & Steinham), what % of Gekko’s initial capital has been wiped out? How much lower is his holding period return (HPR) using leverage, versus paying for BST in cash?

A. Capital wiped out: 75.69%; HPR -31.96%

B. Capital wiped out: 71.94%; HPR -39.56%

C. Capital wiped out: 75.69%; HPR -39.06%

D. Capital wiped out: 71.94%; HPR -39.06%

E. Capital wiped out: 71.02%; HPR -39.56%

F. Capital wiped out: 71.02%; HPR -31.96%

Reference no: EM131938629

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