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

PPP theory states that exchange rates will adjust until the purchasing power of each currency is equalized, as reflected in the price of a common basket of goods.

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

Market makers provide liquidity by continuously quoting bid and ask prices, standing ready to buy or sell securities at those prices.

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

Counterparty risk is the danger that the other party in a financial contract will fail to fulfill its obligations prior to settlement.

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

An American Depositary Receipt (ADR) represents shares in a foreign company and trades on US exchanges in US dollars, simplifying foreign equity investment for American investors.

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

LIBOR was the global benchmark for interbank lending rates underpinning hundreds of trillions in contracts; after manipulation scandals, SOFR became the primary US replacement.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Global Financial Markets 3