Trading Limit

### What is a trading limit? - [ ] It is the maximum volume of trades allowed in a session. - [ ] The minimum price movement allowed in a session. - [x] The maximum price movement allowed in a session. - [ ] The maximum number of open positions allowed in a session. > **Explanation:** A trading limit is the maximum price movement allowed in a session for a security, commodity, or futures contract, intended to prevent excessive volatility. ### What is the primary purpose of a trading limit? - [ ] To increase market liquidity. - [x] To prevent excessive volatility. - [ ] To maximize investor returns. - [ ] To shorten trading sessions. > **Explanation:** The primary purpose of a trading limit is to prevent excessive volatility and maintain market stability. ### How might a trading limit impact investor behavior? - [x] It can help prevent panic selling. - [ ] It allows unlimited short selling. - [ ] It restricts daily trading to a minimum number of transactions. - [ ] It forces all trades to occur at the limit price. > **Explanation:** Trading limits can help prevent panic selling by limiting the maximum permissible price movement within a single trading session. ### On what basis can exchanges change trading limits? - [x] Market conditions and observed volatility. - [ ] Investor preferences. - [ ] Volume of trades. - [ ] Government policies only. > **Explanation:** Exchanges can change trading limits based on observed market conditions and volatility, ensuring the stability of trading activities. ### What happens if the price of a security exceeds the trading limit during a session? - [ ] The security is delisted. - [x] Trading might halt temporarily, or trades could be conducted only at the limit price. - [ ] All trades are canceled. - [ ] The price is automatically adjusted. > **Explanation:** If a security exceeds the trading limit, trading might halt temporarily, or continue at the limit price for the rest of the session. ### Who usually sets trading limits? - [ ] Individual traders. - [ ] Investment advisors. - [x] Exchanges and regulatory bodies. - [ ] Credit rating agencies. > **Explanation:** Trading limits are typically set by exchanges and regulatory bodies to ensure orderly markets and protect investors. ### What does a fluctuation limit refer to? - [x] It is another term for trading limit. - [ ] The minimum change in bid-ask prices. - [ ] Day trading restrictions. - [ ] Margin call thresholds. > **Explanation:** A fluctuation limit refers to the maximum price movement allowed, similar to a trading limit, during a trading session. ### Can trading limits differ between financial instruments? - [x] Yes, they can vary widely. - [ ] No, they are universally the same. - [ ] They depend on the trader's status. - [ ] They are always sector-specific. > **Explanation:** Trading limits can vary widely among different financial instruments such as commodities, stocks, and options, depending on the regulations set by their respective exchanges. ### How are daily price limits related to trading limits? - [x] They represent the maximum price movement permitted within a day. - [ ] They determine closing prices. - [ ] They limit the number of trades. - [ ] They establish the bid-ask spread. > **Explanation:** Daily price limits denote the maximum amount by which the price of a commodity or security can move up or down in one trading day. ### Why might exchanges adjust trading limits in times of crisis? - [ ] To boost trading volumes. - [x] To reduce panic and extreme volatility. - [ ] To alter market fundamentals. - [ ] To benefit certain investors. > **Explanation:** Exchanges might adjust trading limits during times of crisis to reduce panic selling and extreme volatility, contributing to a more stable trading environment.