CIMA Global Capital Markets 3 — Questions and Answers
Question 1: The 'carry trade' strategy in currency markets involves:
- Buying currencies of countries with low interest rates and shorting high-rate currencies
- Borrowing in low-interest-rate currencies and investing in high-interest-rate currencies (Correct answer)
- Matching currency denomination of assets and liabilities precisely
- Hedging all foreign exchange exposure with forward contracts
Correct answer: Borrowing in low-interest-rate currencies and investing in high-interest-rate currencies
A carry trade borrows in a low-yield currency (funding currency) and invests in a higher-yield currency, profiting from the interest rate differential unless exchange rates move adversely.
Question 2: Which institution serves as the 'lender of last resort' for sovereign governments facing balance-of-payments crises in the global monetary system?
- World Trade Organization (WTO)
- Bank for International Settlements (BIS)
- International Monetary Fund (IMF) (Correct answer)
- World Bank Group
Correct answer: International Monetary Fund (IMF)
The IMF provides emergency liquidity and conditional lending programs to member countries experiencing balance-of-payments difficulties.
Question 3: A 'Yankee bond' is defined as:
- A U.S. Treasury bond with a maturity exceeding 30 years
- A foreign bond issued in the U.S. market denominated in USD by a non-U.S. entity (Correct answer)
- A eurodollar bond issued outside the United States
- A municipal bond backed by U.S. federal tax revenues
Correct answer: A foreign bond issued in the U.S. market denominated in USD by a non-U.S. entity
Yankee bonds are USD-denominated bonds issued in the United States by foreign corporations or governments, subject to SEC registration requirements.
Question 4: In global equity markets, the phenomenon where correlations between international markets increase dramatically during financial crises is known as:
- Contagion or correlation breakdown (Correct answer)
- Decoupling hypothesis
- Home bias effect
- Portfolio rebalancing drift
Correct answer: Contagion or correlation breakdown
Contagion refers to the tendency for global market correlations to spike during crises, reducing the diversification benefits investors expected under normal conditions.
Question 5: The Basel III framework primarily addresses capital adequacy for global banks by requiring:
- Minimum sovereign debt holdings in domestic currency
- Higher quality and quantity of regulatory capital plus liquidity coverage ratios (Correct answer)
- Mandatory participation in currency swap lines with central banks
- Limits on cross-border lending to emerging-market sovereigns
Correct answer: Higher quality and quantity of regulatory capital plus liquidity coverage ratios
Basel III strengthened capital quality requirements (common equity tier 1), introduced capital buffers, and added liquidity standards (LCR and NSFR) to improve bank resilience.
Question 6: An investment manager notices that a country's current account deficit is being financed primarily by short-term portfolio inflows rather than foreign direct investment. This situation most suggests:
- Sustainable long-term capital structure with stable financing
- Elevated vulnerability to sudden capital flow reversal ('sudden stop') (Correct answer)
- Strong domestic productivity growth attracting permanent capital
- Low sovereign credit risk due to high external demand
Correct answer: Elevated vulnerability to sudden capital flow reversal ('sudden stop')
Financing a current account deficit with volatile short-term portfolio flows creates vulnerability to a 'sudden stop,' where foreign investors rapidly withdraw, causing a currency and economic crisis.
Question 7: Which of the following is a key distinction between Eurobonds and foreign bonds in global capital markets?
- Eurobonds are always denominated in euros; foreign bonds are in any currency
- Eurobonds are issued outside the home country of the currency; foreign bonds are issued in a foreign country but in that country's currency (Correct answer)
- Eurobonds require SEC registration; foreign bonds do not
- Foreign bonds carry sovereign guarantee; Eurobonds are purely corporate instruments
Correct answer: Eurobonds are issued outside the home country of the currency; foreign bonds are issued in a foreign country but in that country's currency
A Eurobond is issued outside the jurisdiction of the currency of denomination (e.g., USD bonds issued in London), while a foreign bond is issued in a domestic market by a foreign issuer in that market's currency.
CIMA Global Capital Markets 3
The 'carry trade' strategy in currency markets involves: