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Question 1 (50 marks) Margin & Brokerage House (MBH) provides brokerage services, including margin trading and short selling. For margin trading, the call money rate is 10% per annum and interests are compounded annually. Initial margin requirement is set at 60% with maintenance margin of 40%. The margin requirements for short selling are the same as the margin trading. Adam and Eva are customers of MBH. Adam has practice to reinvest all investment returns, while Eva will spend the investment returns for her daily expenditures, Required (round all your final answers to 2 decimal places) a) Adam purchases 1,000 shares of Alibaba on margin, currently selling at $215 per share. i) Construct the balance sheet of his margin account immediately after the position is set up (8 marks) ii) Compute holding period percentage return if Adam closes the position at $250 four months later. (8 marks) b) Eva shorts 20,000 shares of PetroChina at $5 per share. i) Construct the balance sheet of her short selling account immediately after the position is set up (8 marks) ii) Without considering interest cost of borrowing stock, how high the PetroChina's price is when Eva gets a margin call and how much should she deposit again to meet the margin call? (10 marks) iii) Compute holding period percentage return if Eva closes the position at $4.8 four months later. (Ignoring the interest cost of borrowing stock) (8 marks) c) Identify and apply the appropriate performance evaluation method to compare Adam and Eva trading strategy's performance on annualized basis based on their investment practices. (8 marks) Question 1 (50 marks) Margin & Brokerage House (MBH) provides brokerage services, including margin trading and short selling. For margin trading, the call money rate is 10% per annum and interests are compounded annually. Initial margin requirement is set at 60% with maintenance margin of 40%. The margin requirements for short selling are the same as the margin trading. Adam and Eva are customers of MBH. Adam has practice to reinvest all investment returns, while Eva will spend the investment returns for her daily expenditures, Required (round all your final answers to 2 decimal places) a) Adam purchases 1,000 shares of Alibaba on margin, currently selling at $215 per share. i) Construct the balance sheet of his margin account immediately after the position is set up (8 marks) ii) Compute holding period percentage return if Adam closes the position at $250 four months later. (8 marks) b) Eva shorts 20,000 shares of PetroChina at $5 per share. i) Construct the balance sheet of her short selling account immediately after the position is set up (8 marks) ii) Without considering interest cost of borrowing stock, how high the PetroChina's price is when Eva gets a margin call and how much should she deposit again to meet the margin call? (10 marks) iii) Compute holding period percentage return if Eva closes the position at $4.8 four months later. (Ignoring the interest cost of borrowing stock) (8 marks) c) Identify and apply the appropriate performance evaluation method to compare Adam and Eva trading strategy's performance on annualized basis based on their investment practices. (8 marks)

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