PRMIA Exam 8006 Topic 10 Question 96 Discussion

Actual exam question for PRMIA's 8006 exam

Question #: 96
Topic #: 10

A 'short squeeze' refers to a situation where

Aa sharp increase in spot prices due to a shortage in the spot market as shorts try to cover their positions

Ba sharp drop in spot prices as shorts try to drive down prices

Csharp swings in forward basis caused due to normal market movements

Dan increase in forward prices due to factors underlying a contango market overwhelming the factors that take the market into backwardation

Show Suggested Answer

Suggested Answer: A

A short squeeze results when short sellers are trying to cover their short positions by buying in the spot markets, which do not have adequate supply. This results in sharp spikes in spot prices, which further forces any other shorts to try cut their losses. The result is a sharp rise in spot prices.

Choice 'a' is the correct answer, the other choices do not describe a short squeeze.

by Gilma at Sep 11, 2024, 08:17 AM

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Portia

1 months ago

Yeah, that's true. A short squeeze happens when shorts are forced to buy back their positions, driving prices higher.

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Lindsey

2 months ago

I don't think so, a short squeeze is usually associated with prices going up, not down.

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Layla

2 months ago

But what about option B)? Could a short squeeze also result in a sharp drop in spot prices?

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Ben

2 months ago

Ooh, D is an interesting one. An increase in forward prices due to a contango market overpowering a backwardation market. Sounds like a complex scenario, but I'm not sure if that's the definition of a short squeeze.

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Ivan

2 months ago

Haha, C sounds like a wild ride! Sharp swings in the forward basis, like a rollercoaster of prices. But I don't think that's the right answer here.

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Malcolm

21 days ago

D) an increase in forward prices due to factors underlying a contango market overwhelming the factors that take the market into backwardation

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Johanna

23 days ago

B) a sharp drop in spot prices as shorts try to drive down prices

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Phung

1 months ago

A) a sharp increase in spot prices due to a shortage in the spot market as shorts try to cover their positions

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Portia

2 months ago

I agree with Lindsey, a short squeeze definitely leads to a sharp increase in spot prices.

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Matthew

2 months ago

Hmm, I'm not so sure. I was thinking it was B, where a sharp drop in spot prices causes the shorts to try and drive the prices down even further.

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Tess

2 months ago

Oh, I see. Thanks for clarifying!

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Pearly

2 months ago

It's actually A, a sharp increase in spot prices due to a shortage in the spot market as shorts try to cover their positions.

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Clorinda

2 months ago

I think the correct answer is A. A short squeeze is when shorts try to cover their positions, leading to a sharp increase in spot prices due to the sudden demand.

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Reita

2 months ago

Yes, it's definitely A. The sudden demand from shorts trying to cover their positions can lead to a sharp increase in spot prices.

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Johnson

2 months ago

I agree, a short squeeze happens when shorts rush to cover their positions, causing spot prices to skyrocket.

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Allene

2 months ago

Yes, that's correct. It's all about the sudden increase in demand driving up prices.

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Jaclyn

2 months ago

I agree, a short squeeze happens when shorts rush to cover their positions, causing spot prices to skyrocket.

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Lindsey

2 months ago

I think it's A) a sharp increase in spot prices due to a shortage in the spot market as shorts try to cover their positions.

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