CIMA Global Capital Markets 2 — Questions and Answers
Question 1: Which mechanism allows investors to profit when a foreign stock rises but the local currency depreciates against the USD?
- Currency overlay strategy (Correct answer)
- Cross-currency swap
- American Depositary Receipt (ADR)
- Currency forward hedge
Correct answer: Currency overlay strategy
A currency overlay strategy lets a portfolio manager separately manage currency exposure to preserve equity gains even when the foreign currency weakens.
Question 2: In the context of global bond markets, a 'Brady Bond' is best described as:
- A short-term U.S. Treasury instrument
- A restructured emerging-market sovereign debt instrument collateralized by U.S. Treasuries (Correct answer)
- A floating-rate note issued by the World Bank
- A mortgage-backed security issued by Fannie Mae
Correct answer: A restructured emerging-market sovereign debt instrument collateralized by U.S. Treasuries
Brady Bonds were created in the late 1980s to restructure defaulted emerging-market sovereign loans into tradable bonds, partially backed by zero-coupon U.S. Treasuries.
Question 3: The 'Tobin Tax' proposed in international finance is a tax levied on:
- Corporate dividends paid to foreign shareholders
- Short-term currency exchange transactions (Correct answer)
- Long-term foreign direct investment flows
- Cross-border bond coupon payments
Correct answer: Short-term currency exchange transactions
James Tobin proposed a small tax on spot foreign exchange transactions to dampen speculative short-term currency trading while allowing long-term capital flows.
Question 4: Which of the following best characterizes a 'dark pool' in global equity markets?
- A regulated exchange for illiquid small-cap stocks
- A private trading venue where large orders execute without pre-trade transparency (Correct answer)
- An OTC derivatives market for commodity futures
- A government bond auction platform
Correct answer: A private trading venue where large orders execute without pre-trade transparency
Dark pools are private alternative trading systems that allow institutional investors to execute large block orders anonymously, avoiding market impact from pre-trade disclosure.
Question 5: A global investor observing that real interest rates in Country A are significantly higher than in Country B would, under uncovered interest rate parity, expect:
- Country A's currency to appreciate relative to Country B's
- Country A's currency to depreciate relative to Country B's (Correct answer)
- No change in the exchange rate between the two countries
- Country B's inflation rate to rise immediately
Correct answer: Country A's currency to depreciate relative to Country B's
UIP predicts that the higher-interest-rate currency will depreciate to eliminate arbitrage, offsetting the interest rate advantage for foreign investors.
Question 6: Which global capital market index is widely used as the benchmark for international developed-market equities, excluding the United States?
- MSCI Emerging Markets Index
- FTSE All-World Index
- MSCI EAFE Index (Correct answer)
- S&P Global 100 Index
Correct answer: MSCI EAFE Index
The MSCI EAFE (Europe, Australasia, Far East) Index is the standard benchmark for developed-market equities outside North America.
Question 7: In global fixed income, 'duration mismatch' in a sovereign's external debt profile most directly increases which risk?
- Liquidity risk from short-term debt rollover requirements (Correct answer)
- Credit spread widening on domestic corporate bonds
- Equity market volatility in local currency terms
- Inflation pass-through from import prices
Correct answer: Liquidity risk from short-term debt rollover requirements
When a sovereign relies heavily on short-term external debt, it faces rollover risk—the need to refinance frequently at potentially higher rates or in tighter credit conditions.
CIMA Global Capital Markets 2
Which mechanism allows investors to profit when a foreign stock rises but the local currency depreciates against the USD?