When short selling a security in a margin account, what typically happens to dividends paid by the company whose shares have been sold short?

Question: When short selling a security in a margin account, what typically happens to dividends paid by the company whose shares have been sold short?

Answer options: ✅ The short seller is obligated to pay the dividend to the lender of the shares.

• The short seller receives the dividend payment.
• The dividend payment is credited to the short seller's margin account.
• The dividend payment is ignored as the shares are not owned by the short seller.

Correct answer: The short seller is obligated to pay the dividend to the lender of the shares.

Explanation: When shares are sold short, the short seller borrows the shares and sells them. If a dividend is paid while the short position is open, the short seller is obligated to pay the dividend equivalent to the party from whom the shares were borrowed.