IMC Investment Environment 2

Question 1

What is the role of the Financial Services Compensation Scheme (FSCS) in the UK?

Accepted Answer

To compensate eligible investors if an authorised firm fails

Answer

The FSCS is the UK's statutory deposit insurance and investors' compensation scheme. It protects eligible customers of authorised financial services firms that are unable to pay claims against them, providing compensation up to specified limits (e.g., £85,000 for deposits).

Question 2

Which of the following is a characteristic of an exchange-traded fund (ETF)?

Accepted Answer

It trades on a stock exchange throughout the day like ordinary shares

Answer

ETFs are investment funds that trade on stock exchanges during market hours, just like ordinary shares. They can be bought and sold at prevailing market prices throughout the day, unlike traditional open-ended funds which are priced once daily at NAV.

Question 3

In the context of UK fund structures, what distinguishes an Investment Trust from an OEIC?

Accepted Answer

Investment Trusts are closed-ended companies listed on a stock exchange; OEICs are open-ended

Answer

An Investment Trust is a closed-ended company listed on a stock exchange with a fixed number of shares. Its share price can trade at a premium or discount to NAV. An OEIC (Open-Ended Investment Company) creates and redeems shares on demand at NAV, so its size fluctuates with investor flows.

Question 4

What is the primary purpose of a Central Counterparty (CCP) in financial markets?

Accepted Answer

To interpose itself between buyer and seller, guaranteeing trade settlement

Answer

A CCP stands between the two original counterparties to a trade, becoming the buyer to every seller and the seller to every buyer. This process, called novation, significantly reduces counterparty risk and is a key part of post-trade market infrastructure.

Question 5

Which of the following best describes 'dark pool' trading?

Accepted Answer

Private trading venues where orders are not displayed to the public before execution

Answer

Dark pools are alternative trading systems that allow institutional investors to trade large blocks of shares without displaying their orders to the wider market. This helps minimise market impact and price movements that might occur if large orders were visible on public exchanges.

IMC Practice Test

IMC Practice Test

IMC Investment Environment 2