HBS Case 9‐202‐024 Strategic Capital Management, LLC
Instruction for the Case Report
The case report carries 10 marks and should follow the structure suggested below. It should have at most 6 pages including the cover page, and should be printed with line space 1.5 lines and font size 12. The cover page should contain the name of the group, student name and ID number. There is one mark for the clarity of the writing. Note that lecturers will help you to clarify conceptual issues but not specific case questions and calculations. The report is due at 5pm Friday March 29 in the submission box on Level 3 of Block D. No electronic submission will be accepted. Late submission carries point deduction: 5 marks ...view middle of the document...
Should she borrow to purchase Creative Computers (CC)? The initial margin is 50% for both long and short positions. Assume that the arbitrage opportunity disappears when Ubid shares are distributed to CC shareholders. Without considering margin interests on both long and short positions, what should be the minimum rate of return in six months?
Risks in arbitrage (1 mark) What are the risks associated with the arbitrage transactions?
Margin call (3 marks) The maintenance margin is 25% for long and 30% for short positions. The required equity for the portfolio is calculated from individual positions. A margin call is made
if the total equity is lower than the required equity for the portfolio. On 18 Dec 1998, the prices of Ubid and CC were $53.125 and $28.875 respectively. Without considering interests on margin loan and collateral, would Elena get a margin call? For the position that triggered the margin call, Elena is required to increase her margin back to 50%. The required equity on other positions remains the same. What is the total equity requirement in the portfolio after the margin call? How much additional cash does she need to put in to meet the requirement? VI. Realized return (1.5 marks) On June 7, 1999, the closing prices for Ubid and CC are $34 and $32.625 respectively. Is the arbitrage opportunity still present? After the market closed, CC distributed 7.32 million Ubid shares to its shareholders. Without considering margin interests for both long and short positions, what is the rate of return since Dec 9, 1998? What explains the difference with the minimum return in III?