CFA Level I · CFA Level I Exam · Equity Issuance and Trading
An investor sells shares short and the share price subsequently rises sharply. Compared with an investor holding a long position in the same shares, the short seller's maximum potential loss is most likely:
The short seller's potential loss is unlimited, because the share price can rise indefinitely and the shares must eventually be repurchased and returned. A long holder can lose at most the amount invested. The margin deposit and sale proceeds do not cap the loss.
- Alimited to the amount of the initial margin deposit
- Bunlimited because the share price has no upper boundCorrect
- Climited to the original proceeds of the short sale
Explanation
A short seller must buy back shares to return them, and the price can rise without limit, so losses are theoretically unlimited. A long position's loss is capped at the amount invested. The margin deposit does not cap the loss.
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