CFA Practice Question
The proceeds from a short sale ______
II. must remain in the account of the seller.
III. can be invested in short-term, risk-free, interest-bearing securities.
I. can be withdrawn by the seller.
II. must remain in the account of the seller.
III. can be invested in short-term, risk-free, interest-bearing securities.
Correct Answer: II and III
Both II and III govern short sale. The proceeds of the short sale must remain with the broker as security to repurchase the stock later (plus a margin for security against losses). This amount can be invested in highly liquid securities to earn a return for the investor but must be accessible to the broker (in case of emergency liquidation).
User Contributed Comments 2
| User | Comment |
|---|---|
| farhan92 | but by the word "proceeds"wouldn't one assume the short position has been covered and the stock repurchased |
| ascruggs92 | ^No, think of it this way instead. Say you wanted to initiate a short position on a stock at $100 per share. The initiation of a short position essentially entails three steps that happen simultaneously: 1. Borrow $100 from broker. 2. Buy share of stock with borrowed funds. 3. Sell share for $100 dollars At this point, the proceeds of your short sale, $100, can be reinvested in short-term securities or just sit in your account as cash, whichever you like. However, because you are obligated to buy the shares back and return it to the broker (remember, although I listed 1 & 2 separately to make it easier to understand, the broker is really lending you the share, not the cash, and therefore needs the share back, not just the cash), your account has a margin balance equal to the market value of the share that would be uncovered if you removed the proceeds |