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Difficulty: MediumTypes of Orders and Order Execution Strategies

An investor is monitoring stock XYZ, currently trading at 62pershare.Expectingabriefmarketdip,theinvestorwishestoacquire500sharesonlyifthepricefallsto62 per share. Expecting a brief market dip, the investor wishes to acquire 500 shares only if the price falls to 58 or lower. Additionally, the investor insists that the entire 500-share order must be executed immediately in full; if the full quantity cannot be filled right away, the entire order must be immediately canceled. Which order type and time-in-force qualifier combination must be submitted to fulfill these instructions?

  1. A Buy Limit order with a Fill-or-Kill (FOK) qualifierAnswer
  2. B
    A Buy Stop order with a Fill-or-Kill (FOK) qualifier
  3. C
    A Buy Limit order with an Immediate-or-Cancel (IOC) qualifier
  4. D
    A Buy Stop order with an Immediate-or-Cancel (IOC) qualifier

Answer

A Buy Limit order with a Fill-or-Kill (FOK) qualifier
The combination specifying a Buy Limit order with a Fill-or-Kill (FOK) qualifier correctly addresses both investor requirements. A Buy Limit order is placed below the current market price of 62toguaranteethatsharesarepurchasedat62 to guarantee that shares are purchased at 58 or lower. The Fill-or-Kill qualifier ensures that the entire 500-share quantity is executed immediately, or the entire order is canceled immediately without partial execution.

Step-by-Step Solution

1
Determine the correct order type for entering a long position below the current market price.
A Buy Limit order must be used because the investor wants to purchase shares at 58orlowerwhilethecurrentpriceis58 or lower while the current price is 62.
Limit orders guarantee that execution will occur only at the specified limit price or better. Buy Limit orders are entered below the prevailing market price.
2
Determine the appropriate time-in-force qualifier based on fill requirements.
A Fill-or-Kill (FOK) qualifier is required.
Fill-or-Kill requires immediate execution of the entire order quantity. If the full 500 shares cannot be executed immediately, the entire order is canceled.
3
Combine the order type and qualifier.
The correct combination is a Buy Limit order with a Fill-or-Kill qualifier.
This combination fulfills both the price boundary constraint (buying at or below $58) and the execution constraint (entire order filled immediately or canceled).

Key Concept

Order Types and Execution Qualifiers (Limit Orders vs. Stop Orders, FOK vs. IOC)
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Topics

Types of Orders and Order Execution Strategies