Series 7 Exam Question 119: Answer and Explanation

Question: 119

Investors may sell a security short for

I. speculation

II. hedging purposes

III. arbitrage situations

• A. I and II
• B. I and III
• C. II and III
• D. I, II, and III

Correct Answer: D

Explanation:

D. Selling short is a risky practice that allows short sellers to borrow securities to sell them in the market and then repurchase them at a later time. Short sellers are bearish, meaning that they want the price of the security to decline. Because of the risk, all short sales must be executed in a margin account. People sell short for speculation because they feel the market price of the security is going to drop. They may also do it to hedge or protect an investment they have. They may also do it for an arbitrage situation. If they're doing it for an arbitrage situation, a particular security might be trading at two different prices on different markets. In this case, they usually purchase the security on the market with the lower price and short the security on the market with the higher price.