Test 2 Current Events

What is a short option?

Buying an option that profits if a stock's price decreases.

What is the potential loss when buying a short option?

Limited to the price paid for the option.

What is short selling?

Borrowing shares from a broker, selling them immediately, then repurchasing later at a lower price to return them.

What is the goal of short selling?

To profit from a decline in stock price.

What is the risk of short selling?

Unlimited losses if the stock price increases.

Why are losses unlimited in short selling?

Because stock prices can theoretically rise indefinitely.

Who lends shares in short selling?

A broker.

What is WallStreetBets?

A Reddit discussion forum where retail investors share trading strategies.

What unusual statistic triggered GameStop buying activity?

140% of shares were borrowed (shorted).

What is a short squeeze?

When short sellers buying shares to exit positions drives the stock price even higher.

What is a meme stock?

A stock whose price rises mainly due to social media hype rather than fundamentals.

What is the VIX?

An index measuring expected stock market volatility, also known as the Fear Index.

What does a rising VIX indicate?

Increasing market volatility, fear, and uncertainty.

What is the typical normal level of the VIX?

Below 20.

What was the primary business focus of Silicon Valley Bank?

The tech sector.

What is Banking Rule 101 regarding deposits?

Banks should invest deposits in short-term liquid assets.

What mistake did Silicon Valley Bank make with deposits?

Invested heavily in long-term government bonds.

What is interest rate risk?

The risk that bond prices fall when interest rates rise.

What is a bank run?

A situation where large numbers of customers withdraw deposits simultaneously.

What does FDIC stand for?

Federal Deposit Insurance Corporation.

What is the FDIC insurance limit per depositor per bank?

$250,000.

What major geographic issue affected Nike's recent sales?

China market weakness.

What operational issue affected Nike's performance?

Inventory problems.

What is the primary cause of the SVB failure?

Interest rate risk on long-term bonds.

What happens when short sellers exit their positions?

They buy shares to return to brokers, pushing prices higher.

What happens if short sellers ride out a short squeeze?

They continue paying interest while waiting for the price to drop.

Why did GameStop's price increase rapidly?

Retail investors coordinated buying after noticing 140% short interest.

What negative action did Robinhood take during the GameStop surge?

Temporarily halted trading of GameStop stock.

Who is most at risk during meme stock rallies?

The last investors to buy at peak prices.

Where does the VIX trade?

Chicago Options Exchange.

What does a higher VIX signal about risk?

Higher expected market risk.

When did the VIX reach its largest spike historically?

During the 2008 financial crisis.

What happens to bond prices when interest rates increase?

Bond prices decrease.

What happened in the U.S. economy in 2022 that hurt SVB?

Interest rates increased sharply.

How did tech layoffs contribute to SVB's collapse?

Depositors withdrew funds, reducing liquidity.

Which major company was an example of an SVB depositor with uninsured funds?

Roku.

How much money did Roku have at SVB?

$487 million.

Why was Roku's deposit at SVB considered risky?

It exceeded the $250,000 FDIC insurance limit.

What did the government do after SVB collapsed?

Provided liquidity until the bank could be sold.

Why are long-term bonds risky for banks during rate increases?

Their value drops significantly when interest rates rise.

Did Nike meet expectations for the current quarter?

Yes.

What did Nike project for next quarter sales?

Sales expected to decline.

What was the current decline in Nike's China sales?

Down 10%.

What is the projected decline for next quarter in Nike's China sales?

Down 20%.

What happened to Nike's margins?

Margins decreased.

How did investors react to Nike's new strategic direction?

Not well received.

What is a put option?

An option that profits if a stock's price decreases.

Why did short interest above 100% exist for GameStop?

More shares were borrowed and shorted than actually existed due to repeated share lending.

What two choices did short sellers face during the GameStop short squeeze?

Exit and take losses OR hold positions and pay interest while waiting for prices to fall.

What does an increase in the VIX typically indicate about investor sentiment?

Investors expect higher volatility and uncertainty.

Why should banks normally invest deposits in short-term securities?

To maintain liquidity and meet withdrawal demands.

What triggered the SVB bank run specifically?

Falling bond values combined with large depositor withdrawals from tech firms.

What does weak forward guidance signal to investors?

Expected future performance decline.

What is interest rate risk for long-term bonds?

Longer maturity bonds experience larger price declines when interest rates rise.