Consider a hedge fund with $38 million in net asset value (NAV) has taken a $100 million long position in ABC Inc. and a $100 million short position in XYZ Inc. Both positions were opened at $50 per share and both have a 15% margin requirement. Both share prices increase over the next year, with ABC share trading at $55 while the share price of XYZ jumps to $60. Assume that the bank lending rate is 2.00%, the risk free rate on excess cash is 1.75%, the additional debit spread on financing the long positions is 0.25%, and the lending fee (i. e., stock borrow spread) at 0.75% on the short positions. 1. What is the leverage, and gross and net leverage of the hedge fund?
2. What is the P&L (profit and loss) of the hedge fund over the year?
3. What is the change in margin required for the hedge fund? And does it have enough cash to coverthis margin? If not, what must the hedge fund do?