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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

A trader places a sell stop order at 48.00 on a futures contract currently trading at 50.00. Which statement best describes how the order behaves?

A sell stop at 48.00 becomes a market order to sell once the price trades at or below 48.00. It is typically used to limit losses on a long position. It does not execute immediately while the price is still 50.00.

  1. AIt becomes a market order to sell if the price trades at or below 48.00Correct
  2. BIt executes immediately because 48.00 is below the current price
  3. CIt becomes a limit order to buy if the price falls to 48.00
  4. DIt sells only if the price rises to 48.00 or above

Explanation

A stop order becomes a market order once the stop price is reached. A sell stop sits below the current price and is used to limit losses on a long position. It does not execute immediately and it is not a buy order.

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