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Suppose that the current price of eBay is $40 per share. Suppose further that the share price of eBay one month from now depends on the state of the economy as follows:
State of Economy Probability Price
Boom .2 $52
Normal .5 $44
Recession .3 $30
Also note that eBay will not pay any dividends over the next month.
1. You buy 500 shares, using $10,000 of your own money and borrowing the remainder of the purchase price from your broker. The interest rate on the margin loan is 2% per month, and the maintenance margin is 30%. What is the expected return of your investment?
2. What is the probability that you will receive a margin call from your broker one month from now? Explain with quantitative justification.
3. Suppose you sold short 500 shares of eBay at $40, using the maximum leverage allowed, and the price went up to $52 after one month. If you close out your short position, what would be the rate of return on your investment? (Ignoring transaction costs).
legal and ethical considerations in marketing product safety and intellectual propertyreview the pharmacarecompcare
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