CFA CFA Global Markets & Trading 2 — Questions and Answers
Question 1: Which type of market structure uses a central counterparty to match buy and sell orders?
- Exchange-traded market (order-driven market) (Correct answer)
- Over-the-counter (OTC) dealer market
- Direct search market
- Brokered market
Correct answer: Exchange-traded market (order-driven market)
Exchange-traded markets use a centralized order book where buyers and sellers are matched through a formal exchange with standardized rules.
Question 2: The efficient market hypothesis (EMH) in its strong form states that:
- All public and private information is already reflected in stock prices (Correct answer)
- Only publicly available information is reflected in prices
- Only historical price data is reflected in prices
- No information is reflected in market prices
Correct answer: All public and private information is already reflected in stock prices
The strong form of EMH holds that even insider information is incorporated into asset prices, making it impossible to consistently earn excess returns.
Question 3: Dark pools in equity markets are best described as:
- Private trading venues where large block orders can be executed anonymously (Correct answer)
- Exchanges specializing in small-cap securities
- Regulated platforms for trading distressed debt
- Broker-dealer platforms for retail investors only
Correct answer: Private trading venues where large block orders can be executed anonymously
Dark pools are private exchanges or forums for trading securities without displaying orders publicly, often used by institutional investors to minimize market impact.
Question 4: Currency carry trade involves:
- Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency (Correct answer)
- Hedging all foreign exchange exposure using forward contracts
- Investing only in currencies with appreciating exchange rates
- Holding equal amounts of multiple currencies to diversify
Correct answer: Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency
The carry trade exploits interest rate differentials between countries by borrowing cheaply in one currency and investing where yields are higher.
Question 5: Which settlement cycle is standard for US equity trades as of 2024?
- T+1 (one business day after trade date) (Correct answer)
- T+2 (two business days after trade date)
- T+3 (three business days after trade date)
- Same-day settlement (T+0)
Correct answer: T+1 (one business day after trade date)
The US moved to T+1 settlement for equities in May 2024, reducing counterparty and systemic risk compared to the previous T+2 standard.
Question 6: High-frequency trading (HFT) firms primarily generate profits through:
- Capturing tiny bid-ask spreads across a very large number of rapid trades (Correct answer)
- Long-term fundamental analysis and value investing
- Executing large block trades for institutional clients
- Arbitraging mispriced convertible bonds
Correct answer: Capturing tiny bid-ask spreads across a very large number of rapid trades
HFT firms use ultra-fast algorithms to trade at extremely high volumes, profiting from small price discrepancies and market-making spreads.
CFA CFA Global Markets & Trading 2
Which type of market structure uses a central counterparty to match buy and sell orders?