What is a potential consequence of short-sale risk for an investor?

• A. Being unable to execute trades
• B. Being forced to cover positions at unattractive prices
• C. Losing the ability to short sell entirely
• D. Increased transaction costs

Answer: (B)

Short-sale risk primarily refers to the potential adverse market movements that can affect an investor's short positions. When an investor engages in short selling, they are betting that the price of a security will decline. However, if the price rises unexpectedly, the investor faces significant risks. Specifically, one of the most notable consequences of this risk is being forced to cover short positions at unattractive prices.

When the market price of a stock increases, short sellers are often required to buy back the shares they borrowed at higher prices, leading to potential losses. This situation can happen rapidly in a bullish market or when there is sudden positive news about the company whose shares are being sold short. The urgency to cover the position can result in executing trades at much higher prices than anticipated, crystallizing losses for the investor.

Thus, the possibility of needing to cover at an unfavorable price is a direct consequence of short-sale risk, emphasizing the volatility and the unpredictable nature of the market and stock movements.