One Way for an Investor to Protect Themselves When Selling

question 19

Multiple Choice

One way for an investor to protect themselves when selling stock short is to

• A) not make the sale on margin.
• B) buy an offsetting amount of the same shares coincident with the short sale to perfectly hedge the transaction.
• C) issue a stop buy limit order at a price somewhere above the short sale price.
• D) An investor cannot protect against large losses in a short sale transaction.

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Definitions:

Inflation Rate

The rate of growth in the broad cost of goods and services, which adversely affects the power of procurement.

Real Rate

The interest rate that has been adjusted for inflation, representing the real cost of funds to the borrower and the real yield to the investor.

Coupon Rate

The annual interest rate paid by a bond issuer to the bondholders, typically expressed as a percentage of the bond's face value.

Yield To Maturity

The total return anticipated on a bond if the bond is held until its maturity date, taking into account its current market price, face value, interest rate, and time to maturity.