Reference no: EM132202131

Question - A year ago an investor opened an account at a brokerage firm and promptly (a) short sold 200 shares of Company S at $120 and (b) bought 500 shares of Company L on margin at $80. Assume (1) the initial margin requirement was 60% for both margin purchases and short sales, (2) interest at an annual rate of 5% is paid by the investor on the margin loan, and (3) 3% is received annually by the investor on both the short proceeds and the short sale initial margin. The investor met the initial margin requirements for the account on the day these two transactions took place, but has not added or taken assets from the account since then (and no assets or liabilities were in the account right before the transactions took place). Neither stock pays dividends.

a. What does the investor's account look like immediately after these trades were made (that is, create the investor's initial balance sheet at the brokerage firm, showing assets, liabilities, and equity regarding the investor's account)?

b. What does the investor's account look like today (i.e., a year after these trades were made) when at closing S = $150 and L = $50? Assume earlier today that interest earned on the short proceeds and short margin as well as the interest owed on the margin loan for the margin purchase were each added to the investor's account as either an asset (for interest earned) or liability (for interest owed). (Again, create the investor's balance sheet at the brokerage firm, showing assets, liabilities, and equity regarding the investor's account "today").