FIA Global Financial Markets 2 — Questions and Answers
Question 1: Which organization is responsible for setting international banking capital adequacy standards known as the Basel Accords?
- Bank for International Settlements (Correct answer)
- International Monetary Fund
- World Bank
- Financial Stability Board
Correct answer: Bank for International Settlements
The Bank for International Settlements (BIS) hosts the Basel Committee on Banking Supervision, which produces the Basel Accords on capital adequacy.
Question 2: In currency markets, what does a 'spot transaction' refer to?
- A trade settled within two business days at the current exchange rate (Correct answer)
- A forward contract locked in today for future delivery
- An options contract on a currency pair
- A swap exchanging currency cash flows over multiple periods
Correct answer: A trade settled within two business days at the current exchange rate
A spot transaction is a foreign exchange deal where currencies are exchanged at the current (spot) rate and settlement occurs within two business days.
Question 3: What is the primary purpose of the IMF's Special Drawing Rights (SDRs)?
- To supplement member countries' official foreign exchange reserves (Correct answer)
- To provide direct loans to private corporations
- To set global interest rate benchmarks
- To regulate cross-border capital flows
Correct answer: To supplement member countries' official foreign exchange reserves
SDRs are an international reserve asset created by the IMF to supplement member nations' official reserves and support global liquidity.
Question 4: Which market structure is most characteristic of the global foreign exchange market?
- Decentralized over-the-counter (OTC) network of dealers (Correct answer)
- Centralized exchange with a single clearing house
- Government-controlled fixed-price mechanism
- Auction-based platform open only during business hours
Correct answer: Decentralized over-the-counter (OTC) network of dealers
The forex market is a global, decentralized OTC market where banks, dealers, and institutions trade currencies directly with each other 24 hours a day.
Question 5: A country running a persistent current account deficit is most likely financing it through which mechanism?
- Net capital inflows from foreign investors (Correct answer)
- Reductions in domestic money supply
- Increases in domestic government spending only
- Export of natural resources
Correct answer: Net capital inflows from foreign investors
A current account deficit must be offset by a capital account surplus, meaning the country attracts net foreign investment or borrowing to balance its payments.
Question 6: What does the term 'carry trade' mean in global currency markets?
- Borrowing in a low-interest-rate currency and investing in a higher-yielding currency (Correct answer)
- Buying a currency immediately and simultaneously selling a forward contract
- Exchanging one currency for another to pay for imports
- Using derivatives to hedge foreign exchange exposure
Correct answer: Borrowing in a low-interest-rate currency and investing in a higher-yielding currency
A carry trade profits from the interest rate differential by borrowing cheaply in a low-rate currency and investing the proceeds in a higher-rate currency.
Question 7: In global bond markets, what does a 'Eurobond' refer to?
- A bond issued in a currency other than the currency of the country in which it is issued (Correct answer)
- Any bond issued by a European Union member state government
- A bond denominated exclusively in euros
- A bond backed by the European Central Bank
Correct answer: A bond issued in a currency other than the currency of the country in which it is issued
A Eurobond is issued in a currency different from the domestic currency of the country where it is sold, allowing issuers to access international capital markets.
FIA Global Financial Markets 2
Which organization is responsible for setting international banking capital adequacy standards known as the Basel Accords?