You short-sell 200 shares of Rock Creek Fly Fishing Co.,now selling for $50 per share.If you wish to limit your loss to $2,500,you should place a stop-buy order at ____.

Question

Quizplus · Accepted Answer

To limit the loss to $2,500, we need to calculate the total value of 200 shares i.e. 200*$50 = $10,000. 
Thus, if the price increases and we want to buy back the shares to close the short position, we need to limit our loss to $2,500, which means we can buy back the shares for $7,500. 
The stop-buy order will be triggered when the price reaches $62.50, which means we buy back the 200 shares for $12,500 ($62.50*200) and our loss is $2,500 (($62.50-$50)*200). Therefore, B is the correct answer.

You Short-Sell 200 Shares of Rock Creek Fly Fishing Co