FINA Exam 1 Current Events

VIX & its importance

Volatility Index --> "Fear Index".

- Option that trades on the Chicago Board of Exchange

- measure of stock price volatility

Event:

- Us threatened 25% Tariffs on Columbia for Deportation challenge. VIX increased 40%.

- Columbia didn't let the deportation plane land

DeepSeek & Importance

**built at a fraction of cost of exiting AI

- Open Source AI, developed in China

- doesn't use high speed NVIDIA chips, causing NVIDIA lost 17% stock ($595 billion)

- S&P 500: Has large weighting in NVIDIA, so NVIDIA stock can impact the overall S&P 500 index.

Trump Tariffs & Impact, Affect on markets

Tariffs are taxes on imports. Trump implemented as a negotiating tactic to get other countries to start regulating drugs, specifically fentanyl entering the US.

China - 10%, Mexico - 25%, Canada - 25%.

Impact - price of taxes are passed on to increase prices, increase inflation, and decrease company earnings.

Affect on markets: DOW decreased >600 points, S&P decreased by 2%, VIX up 40%.

**Caused uncertainty

2007-2009 Financial Crisis Policy/Sentiment

"Everyone should own a house"

- Capital requirements for banks lowered in 2004 to help after 9/11, so banks could take on more debt (leverage)

- Fannie Mac/Freddie Mae were enterprises created by Congress to back mortgages, aiding the relaxed standards.

2007-2009 Financial Crisis:

Mortgage rates & Demand, Sub-Prime lending

- Interest rates were low due to 9/11, so demand for mortgages increased.

- Brokers were paid in commission (quantity over quality)

Subprime lending: extending loans to risky borrowers.

- often with low "teaser rates" to get into the house/loan, which increases after 1-3 years

*Idea: Borrower needs to refinance before the rate increases, only works if home prices increase

Mistake beliefs of the Housing Market

1. Home prices always increase

2. Homes are investments to make money

3. Home prices are independent across the country

2007-2009 Financial Crisis:

Big Banks - what would they do?

Banks would buy/sell mortgages for investors (even sub-prime ones) & sell them in bundles called CDOs - collaterized debt obligations

CDOs were rated by credit agencies (AAA/AA... etc)

Interest rates increase, housing demand decrease, house prices decrease, subprime defaults increase, CDO value decrease

2007-2009 Financial Crisis:

How did people try to short the market?

People tried to short the market by buying Credit default swaps (CDS) as insurance on CDOs, thereby receiving the payouts as insurance when the market crashed

What kinds of firms banked with Silicon Valley? (SVB)

As the duration of an investment increastes, what happens to the exposure to interest rate risk?

-Tech firms/startups, those in need of very large mortgages

- As duration increases, so does exposure to interest rate risk.

*Banking 101: Investments using depositer money should be short-duration

Why did people want their deposits back from Silicon Valley Bank (SVB)?

- Inflation hurt the tech sector, a major client base for SVB, leading to a decline in business activity.

- As tech companies faced financial pressures, they began withdrawing deposits to cover payroll and other expenses.

- As more people withdrew funds, fear spread that the bank would run out of money, leading to a bank run.

What did Silicon Valley Bank (SVB) invest in?

- SVB primarily invested in long-term U.S. Treasury bonds.

- These bonds, while considered safe, were sensitive to changes in interest rates and inflation.

- As inflation increased, bond yields (YTM) rose, causing bond prices to fall and decreasing the value of SVB’s Treasury holdings.

What was the FDIC?

What issue did Roku have, and how does it relate to SVB?

The Federal Deposit Insurance Corporation was intended to insure deposits for banks up to 250k. Most of Roku's investments were >250k.

Roku, specifically, had 500 million in SVB. When SVB invested in risky areas, Roku lost money as a bank run began and everyone pulled out money.

DOW Jones Industrial Average (DJIA) - What is it and how is it valued?

When do DJIA prices change?

- Stock market index of 30 companies

- Value of index = sum of the prices of one share for each company / constant #

- Companies with high share prices drive the index (because it's more influential in increasing the total sum of all share of the companies together)

- Prices can change when actual events are different than what market expects

DOW Jones Industrial Average (DJIA) Current Event

DJIA went up 700 points in one day because of the following, causing stock prices to increase:

- Banks exceeded earning expectations for 2024 Q4.

- Inflation (3.2%) was lower than expected (3.3%)

High Share prices companies of Dow Jones - DJIA

1. United Healthcare group

2. Microsoft

3. Home Depot

Also NVIDIA, Apple, Amazon, Walmart

Credit Card Balances

What is the total credit card debt at the end of Q3 2024?

What is the % increase in credit card defaults? How much was written off?

How much interest did Americans pay on Credit cards in 2024? What is the avg unpaid balance?

- $1.166 trillion in Credit Card Debt at the end of Q3

- 51% increase in defaults, totalling $46 billion written off by lenders.

- Increased because of COVID, extra spending, wage growth not matching inflation

- $170 billion in credit card interest paid in 2024. Average unpaid balance: $7236.

T/F. The FDIC ultimately only covered 250k for each depositor at SVB.

False. Initially, the FDIC only guaranteed deposits up to $250,000 per depositor. However, on March 12, 2023, U.S. regulators (including the FDIC, Treasury, and Federal Reserve) announced that all depositors would be fully protected, even those with balances above $250K.

This meant that companies like Roku (with $500M in SVB) and other large depositors got all their money back.

T/F. SVB shareholders and bondholders were protected and got all their money back.

False. While companies like Roku got their money back, SVB’s shareholders and bondholders were not protected and lost their investments.