1.1.4 Short-Selling Assets

Question 1

Long Position

Answer 1

You benefit from a price increase of asset

Question 2

Short Position

Answer 2

You benefit from a price decrease of asset

Question 3

Short-Selling Process

Answer 3

1) Borrow Stocks now
2) immediately sell the borrowed stick
3) buy the shares back at later date

Question 4

Covering short position

Answer 4

returning the borrowed stocks to the lender

aka closing a short position

Question 5

Reasons to Short-sell

Answer 5

1) speculating - an investor can benefit from price decrease
2) financing - it is a way to borrow money (especially common in bond markets)
3) hedging - offset the risk of owning the stock

Question 6

Short-Sell proceeds

Answer 6

When a lender lends stocks to the short-seller, there is no guarantee of getting the shares back. In order to make sure they receive the stocks back they either hold on to the proceeds or let’s a third-party hold onto the proceeds until the borrowed shares are returned to the lender. Belongs to Short-seller

Question 7

haircut

Answer 7

collateral to compensate for the risk that the short-seller may no be able to afford to buy the stock back, the haircut will be returned to the short-seller when the short-seller successfully returns the stock to the lender. Belongs to Short-seller

Question 8

short rebate

Answer 8

interest earned on collateral in the stock market, determined by lender

Question 9

repo rate

Answer 9

interest earned on collateral in a bond market, determined by lender

Question 10

Who gets dividends if short-sell?

Answer 10

Neither the short-seller or lender does, the investor who purchased it from the short-seller will receive any dividends. However, since the lender would have otherwise received the dividends the short-seller needs to pay any declared dividends to the lender

Question 11

lease rate

Answer 11

the payment required by the lender