You short-sell 300 shares of rock creek fly fishing company, now selling for $20 per share. if you want to limit your loss to $1,350, you should place a stop-buy order at $24.5.
Given,
300 shares of rock creek fly fishing company are short sold.
now selling for $20 per share.
I want to limit your loss to $1,350.
When an investor borrows security, he or she sells it on the open market with the intention of later purchasing it at a lower price.
Short-sellers wager on and profit from a decline in the price of securities. Contrast this with long-term investors who want the price to increase.
Amount received from short sale = 300 × $20 = $6,000
Let the stop-buy order be at price 'P'.
Loss = $1,350 = 300P − $6,000
$7,350 = 300P,
so P = $24.5
Hence, stop-buy order should be placed at $24.5.
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