Which risk is very unliked to be related to short-selling? A. Regulatory risk B. Unlimited Downside risk C. Forced buy-in risk D. Operational risk
Question
Which risk is very unliked to be related to short-selling?
A. Regulatory risk
B. Unlimited Downside risk
C. Forced buy-in risk
D. Operational risk
Solution
B. Unlimited Downside Risk is not a risk that is unlikely to be related to short-selling. In fact, it is one of the primary risks associated with short-selling. Here's why:
- Unlimited Downside Risk: When you short sell, you borrow shares and sell them with the hope that you can buy them back at a lower price. However, if the price of the stock increases instead of decreasing, you could potentially face unlimited losses. This is because there's no limit to how high a stock's price can go, and you're obligated to buy it back to return the shares you borrowed.
The other risks mentioned are also associated with short-selling:
-
Regulatory Risk: Short-selling is subject to various regulations and restrictions. Changes in these regulations can impact the profitability of short-selling strategies.
-
Forced Buy-In Risk: If the lender of the shares wants them back and you're unable to find another lender, you may be forced to buy the shares back at the current market price, regardless of whether it's higher than the price at which you sold them.
-
Operational Risk: This refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. It's a risk inherent in all business activities, including short-selling.
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