Lesson 7 of 8 · All lessons in this module
- What the financial system does, and what makes it work well
- Classifying assets and markets: securities, pooled vehicles, currencies, commodities and real assets
- Contracts: forwards, futures, swaps, options and insurance
- Financial intermediaries and the services they provide
- Long, short and leveraged positions: leverage ratio, margin return and margin callsVideo lesson
- Orders: execution, validity and clearing instructionsVideo lesson
- Integrated cases: a leveraged loss, a hedge with a floor and a stop-limit buy
- Primary markets, secondary markets and how trades are arranged
Lesson 7 of 8 · 16 min
Integrated cases: a leveraged loss, a hedge with a floor and a stop-limit buy
In a case, the exhibit gives you the inputs; the skill is picking the right lines: equity including the purchase commission, interest on the loan only, a put as a floor rather than a lock, and a stop-limit buy that caps the price only if it fills.
In short
- Read a margin exhibit for five inputs: price, initial and maintenance margin, loan rate and holding period, per-share costs, and dividends.
- The return denominator is equity plus the purchase commission; interest is charged on the loan only, for the holding period only.
- A loss case is worse than leverage × price return because interest and commissions are costs on top of the price fall.
- A forward locks one rate; a put sets a floor on proceeds and keeps the upside, at the price of the premium.
- A stop-limit buy limits the price you pay only if it fills; a gap above the limit leaves a short position open.
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