Question

As a savvy investor you see a financial opportunity in the current bank failures of Silicon Valley Bank and other regional banks who were heavily concentrated in a single sector – venture capital-backed startups in tech and healthcare – and a single region – Northern California. What would be your course of appropriate action? A. Contact your regional Federal Reserve Bank and advocate that these need more cash. B. Purchase a Credit Default Swap (CDS) on some, or all, of these banks. C. Purchase some, or all, of the bank stocks and then buy a CDS on the stock you buy. D. Both b and c.

Answer 1

As a savvy investor your course of action would be D. Both b and c.

What should the investor do ?

A CDS is a contract that pays you a certain amount if the issuer (the bank) defaults on its debt. In this case, if the bank fails, the CDS would pay you, offsetting some of your losses.

Purchasing some, or all, of the bank stocks could be a good opportunity if you believe the bank failures are temporary and the banks will recover. However, this is a risky strategy as bank stocks can be volatile, especially during financial crises.