PRMIA Exam 8006 Topic 4 Question 52 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam

Question #: 52
Topic #: 4

[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

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 Kattie at May 29, 2022, 03:25 AM

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