Investment Environment Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Environment flashcards as text
Which of the following is the primary market for UK government securities (gilts)?
Answer: The Debt Management Office (DMO) auctions
The Debt Management Office (DMO) is the executive agency of HM Treasury responsible for issuing gilts through regular auctions. This is the primary market where gilts are first sold to investors, primarily Gilt-Edged Market Makers (GEMMs).
What is the role of a market maker in the UK equity market?
Answer: To provide continuous two-way prices, offering to buy and sell securities
Market makers provide liquidity by continuously quoting bid (buy) and offer (sell) prices for securities. They profit from the bid-offer spread and are obligated to make a market in their designated securities, ensuring investors can trade even when natural counterparties are unavailable.
What does the term 'settlement risk' refer to in securities trading?
Answer: The risk that one party delivers securities or cash but the counterparty fails to do so
Settlement risk (also called delivery risk or Herstatt risk) occurs when one party to a transaction fulfils its obligation (e.g., delivers securities) but the counterparty fails to deliver the corresponding payment or securities. This is mitigated by delivery-versus-payment (DvP) systems.
In the UK, what is the standard settlement cycle for equity trades on the London Stock Exchange?
Answer: T+2 (two business days after trade)
The standard settlement cycle for UK equities on the London Stock Exchange is T+2, meaning the transaction is settled two business days after the trade date. This allows time for the administrative processes of transferring ownership and payment.
Which of the following best describes an 'open-ended' investment fund?
Answer: A fund that can issue and redeem units based on investor demand
An open-ended fund (such as a UK OEIC or unit trust) creates and cancels units in response to investor demand. When investors buy, new units are created; when they sell, units are cancelled. The fund size expands and contracts accordingly.
What is the primary function of a custodian in the investment management industry?
Answer: To safeguard and administer client assets
A custodian is responsible for the safekeeping of client assets (securities and cash), settlement of trades, collection of income (dividends and interest), and corporate actions processing. They do not make investment decisions — that is the role of the fund manager.