Canadian Securities Course (CSC) Level 1 Practice Exam

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When would a short seller be required to cover their position?

If the stock price decreases by 5%.
If the stock price increases by 2%.
If their dealer doesn't have enough stock to lend out.
If the stock gets included in a major stock index.

The correct answer is: If their dealer doesn't have enough stock to lend out.

A short seller would be required to cover their position if their dealer doesn't have enough stock to lend out. This is because short selling involves borrowing shares from a broker in order to sell them in the market with the expectation that the price will fall. If the broker does not have enough shares available for lending, the short seller would be required to buy back the shares to cover their position. Options A and B are incorrect because they are based on market price movements, which, although may trigger a short seller to consider covering their position, are not mandatory conditions for covering a short position. Option D is incorrect because the inclusion of a stock in a major stock index does not directly implicate a short seller's obligation to cover their position.