CFA Global Markets & Trading Flashcards

The purchasing power parity (PPP) theory of exchange rates states that:

Answer: Exchange rates adjust so that identical goods cost the same across countries when expressed in a common currency

PPP theory holds that exchange rates should equalize the price of a basket of goods across countries, with currency values adjusting to reflect inflation differentials.

Emerging market investments are generally characterized by:

Answer: Higher potential returns but greater political, currency, and liquidity risks compared to developed markets

Emerging markets offer higher growth potential but carry additional risks including political instability, currency volatility, and less liquid capital markets.

A cross-listing of a company's shares on a foreign exchange is primarily done to:

Answer: Access a broader investor base and potentially lower the cost of capital

Cross-listing allows companies to tap into foreign capital markets, increasing visibility, shareholder base, and potentially reducing the firm's cost of equity.

Which of the following describes a primary market transaction?

Answer: A company issues new shares in an IPO to raise capital

Primary market transactions involve the issuance of new securities where proceeds go directly to the issuing company, as in an IPO or seasoned equity offering.

American Depositary Receipts (ADRs) allow US investors to:

Answer: Invest in foreign companies through US-listed dollar-denominated instruments

ADRs are US-listed certificates representing shares of a foreign company, allowing US investors to hold international equities without foreign exchange brokerage accounts.

The concept of market microstructure primarily studies:

Answer: How trading mechanisms and market design affect price discovery and transaction costs

Market microstructure examines the processes and mechanisms by which securities are traded and how prices are formed in financial markets.