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In a short sale scenario, the lender of the stock may require the borrower to post...

In a short sale scenario, the lender of the stock may require the borrower to post collateral to mitigate against default risk. Can the lender eliminate their exposure to default risk with collateral? Explain why they can or cannot.

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Answer #1

Yes, the lender can eliminate their exposure to default risk with collateral by taking the collateral which have a same value of the loan borrowed by borrower from lender. if borrower default, borrower will lose the collateral. If borrower default on the money a lender gave you to purchase a collateral, the lender can repossess that collateral and turn around and sell it at an auction as a way to recover the amount of the loan. They can do that Because they are taking a risk so they want you to risk something too.

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