Equity Reading 47 EOC #28 understand, correct, someone, next

Kiakaha

Can someone help me understand why the answer is B?

What if the shares hit 50 for a brief moment, thereby validating the order, and the next moment they jump to 55.1, invalidating the limit? Isn't C technically correct?

infinitybenzo

Reading 47 is all about corporate finance, yo? Did you mean Reading 55 (Dec 2011)?

Assuming this question relates to Reading 55, "B" is correct as given. A stop limit order must satisfy *both* the conditions to be true. If you think logically, the brokerage will check something along the lines -- "if the stop price is breached AND the limit price is NOT breached," go ahead and execute the order. The order gets executed at a point in time, so once the price is set, it can't change. Again, BOTH conditions are checked at the point in time when the order is filled.



Edited 1 time(s). Last edit at Friday, September 9, 2011 at 09:30AM by Oyster.

bleach

Checking both conditions doesn't really address the problem. Again, if the price jumps to 55.1 from say 49.9, then none of the conditions will be met and the loss will be unlimited.

I can see where the writer of this question was trying to get at. I'm just not convinced that B is unequivocally correct.

In the 2012 curriculum, this is reading 47, page 76 of the Equity and FI book.

jbaldyga

Also going back to what you said, 'stop 50' is a validity instruction while 'limit 55' is an execution instruction, so technically speaking the order becomes valid the moment the shares hit/exceed 50, and it is executable only for prices <55. I feel like these are two separate components of the order, and need not necessarily considered together.

yospaghetti

orang3eph Wrote:
-------------------------------------------------------
> Checking both conditions doesn't really address
> the problem. Again, if the price jumps to 55.1
> from say 49.9, then none of the conditions will be
> met and the loss will be unlimited.

You're thinking, it seems, in terms of whole numbers and ticker symbols. Think of a basic number line - you can't go from 49.9 to 55.1 without going through 50 and 55 first. To the naked eye, it may seem instantaneous, but the trading algorithms account for precise decimal increments going from 50 to 55.

By your theory, a lot of people on the street today should have lost their shirts because a lot of stocks "skipped" price increments/decrements . For example, ORCL went from 26.6 to 26.0, "skipping" 6/10 of a dollar, and along the way ignoring all the limits (for stop limit orders) at 26.1?

It seems people weren't kidding when they said they trimmed a lot of fat from those crappy Econ readings for 2012. How many total readings do you guys have for 2012?



Edited 1 time(s). Last edit at Friday, September 9, 2011 at 06:39PM by Oyster.