FIA Global Financial Markets 3

Question 1

Which of the following best describes 'purchasing power parity' (PPP) as a theory of exchange rates?

Accepted Answer

Exchange rates should adjust so that identical goods cost the same in different countries

Answer

Exchange rates are determined solely by interest rate differentials

Answer

Governments set exchange rates to maximize export competitiveness

Answer

Exchange rates reflect only speculative capital flows

Question 2

What is the primary role of a market maker in global financial markets?

Accepted Answer

To continuously quote both buy and sell prices, providing liquidity

Answer

To execute trades only on behalf of retail investors

Answer

To set regulatory limits on daily trading volumes

Answer

To audit financial statements of listed companies

Question 3

Which type of risk refers to the possibility that a counterparty in a financial transaction will default before settlement?

Accepted Answer

Counterparty risk

Answer

Liquidity risk

Answer

Systemic risk

Answer

Currency risk

Question 4

In global equity markets, what does 'ADR' stand for and what is its purpose?

Accepted Answer

American Depositary Receipt — allowing US investors to buy shares in foreign companies in dollars

Answer

Adjusted Daily Return — measuring equity performance net of fees

Answer

Automated Deal Routing — directing orders to the best-priced exchange

Answer

Annual Dividend Report — disclosing a company's distribution history

Question 5

What is the significance of LIBOR (London Interbank Offered Rate) in global financial markets, and what is replacing it?

Accepted Answer

It was the benchmark rate for trillions in loans and derivatives; SOFR is replacing it in the US

Answer

It was the ECB's official policy rate; replaced by the Euro Short-Term Rate (€STR)

Answer

It was the rate at which central banks lent to commercial banks; replaced by the Fed Funds Rate

Answer

It was a credit rating benchmark; replaced by Bloomberg Indices

Question 6

Which global financial crisis event in 2008 triggered widespread contagion across international markets?

Accepted Answer

The collapse of Lehman Brothers, a major US investment bank

Answer

The bankruptcy of the Japanese government bond market

Answer

The failure of the European Central Bank to set rates

Answer

The simultaneous closure of all major stock exchanges

Question 7

What does a 'yield curve inversion' signal to financial market participants?

Accepted Answer

Short-term interest rates exceed long-term rates, often seen as a recession predictor

Answer

Central banks are expanding the money supply to stimulate growth

Answer

Foreign demand for domestic bonds has surged, flattening returns

Answer

Equity markets are overvalued relative to fixed income