I85PREP
⌘ K
ACI Dealing Certificate study materials
ACI Dealing Certificate study resources

ACI Dealing Certificate practice questions

One question at a time. Build your ACI Dealing Certificate understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Financial Markets Environment

In the ACI Dealing Certificate syllabus, which function is performed by a central bank operating as lender of last resort?

  1. Providing liquidity to a solvent but temporarily illiquid bank facing a funding shortfall Correct answer.
  2. Guaranteeing the settlement obligations of private clearing members
  3. Setting the coupon on newly issued government bonds sold at auction
  4. Acting as registrar for corporate bond transfers between investors

Explanation

Lender of last resort means the central bank supplies emergency liquidity to institutions that are solvent but cannot obtain market funding. It is a crisis liquidity function, distinct from debt management, registry work and settlement guarantees.

Question 2Financial Markets Environment

A dealer quotes a two-way price of 1.0850/1.0855 in EUR/USD. A client sells EUR 10 million to the dealer at the quoted price. What is the EUR/USD rate applied?

  1. 1.0855
  2. 1.08525
  3. 1.0850 Correct answer.
  4. 1.0875

Explanation

When the client sells base currency, the dealer buys, so the dealer's bid applies. The bid is the lower of the two quoted rates, here 1.0850.

Question 3Financial Markets Environment

Which money market instrument is issued at a discount and redeemed at face value, with no coupon payments?

  1. A floating rate note
  2. An equity share
  3. A treasury bill Correct answer.
  4. A fixed-rate bond paying semi-annual coupons

Explanation

Treasury bills are pure discount instruments: the investor pays less than face value and receives par at maturity. The return is the difference between purchase price and redemption amount, not a periodic coupon.

Question 4Financial Markets Environment

Which body is responsible for setting the euro area's monetary policy, including the level of the ECB's key interest rates?

  1. The Eurogroup of finance ministers
  2. The European Banking Authority
  3. The European Systemic Risk Board
  4. The Governing Council of the ECB Correct answer.

Explanation

Monetary policy decisions for the euro area are taken by the ECB Governing Council, which comprises the Executive Board and the national central bank governors. The other bodies deal with macroprudential oversight, fiscal coordination and banking supervision standards respectively.

Question 5Financial Markets Environment

What does a T+2 settlement convention mean for a spot foreign exchange transaction?

  1. The trade is settled two calendar weeks after the trade date
  2. The trade is settled on the second business day of the following month
  3. The trade is settled two hours after the trade is agreed
  4. The trade is settled two business days after the trade date Correct answer.

Explanation

T+2 means value date is two business days after the trade date, subject to currency holiday calendars. Spot FX conventionally settles on that basis rather than on calendar days or intraday.

Question 6Financial Markets Environment

A bank's treasury desk needs overnight funding against eligible collateral. Which market is the most direct source of such unsecured or secured short-term cash?

  1. The corporate bond new-issue market
  2. The primary market for government bonds
  3. The equity secondary market
  4. The money market Correct answer.

Explanation

The money market is where short-dated liquidity, including overnight deposits and repo, is raised and placed. Bond and equity markets fund longer-term capital needs rather than day-to-day cash positions.

Question 7Financial Markets Environment

Which statement best describes the role of a broker in the interbank market?

  1. The broker acts as custodian for the securities exchanged
  2. The broker guarantees the credit of both counterparties to the trade
  3. The broker takes the market risk onto its own book and quotes two-way prices
  4. The broker matches buyers and sellers anonymously and earns commission Correct answer.

Explanation

Interbank brokers intermediate between dealers, preserving anonymity and charging a brokerage fee, without taking principal risk. Principal risk-taking is the dealer's function, and credit guarantees and custody sit elsewhere.

Question 8Financial Markets Environment

A dealer quotes USD/JPY 110.20/110.25. A corporate client wants to buy USD 5 million. Which rate does the client pay?

  1. 110.45
  2. 110.25 Correct answer.
  3. 110.20
  4. 110.225

Explanation

A client buying USD pays the dealer's ask, which is the higher rate of the two-way price. Here the ask is 110.25, so the dealer sells USD at that level.

Question 9Financial Markets Environment

Which risk arises from the possibility that a counterparty fails to pay its side of a foreign exchange transaction after the other side has already been delivered?

  1. Interest rate risk
  2. Herstatt (settlement) risk Correct answer.
  3. Operational risk from keying errors
  4. Liquidity risk from a funding gap

Explanation

Herstatt risk is the risk that one leg of an FX transaction is paid away while the counterparty defaults before paying the other leg. It arises from the timing mismatch in cross-currency settlement.

Question 10Financial Markets Environment

A trader expects the ECB to raise rates more aggressively than the Fed over the coming year. Which spot or forward position is most consistent with that view?

  1. Buy EUR/USD spot expecting the euro to appreciate Correct answer.
  2. Buy USD/JPY forward expecting dollar strength
  3. Sell EUR/USD spot and buy it forward
  4. Buy EUR/USD forward if the interest differential already favours the euro

Explanation

A relatively more hawkish ECB path should support the euro, so a long EUR/USD spot position expresses that view directly. The other choices either contradict the view or misapply forward pricing logic.

Question 11Financial Markets Environment

A bank holds a bond portfolio with a modified duration of 5. A 50 basis point rise in yields would produce an approximate price change of:

  1. A fall of about 5.0%
  2. A fall of about 2.5% Correct answer.
  3. A rise of about 2.5%
  4. A fall of about 0.5%

Explanation

Approximate price change equals minus modified duration multiplied by the yield change. Here 5 × 0.005 = 0.025, so a yield rise of 50bp implies a fall of roughly 2.5%.

Question 12Financial Markets Environment

Which feature distinguishes a repo from an outright sale of securities?

  1. A repo is a secured borrowing with an agreed repurchase of equivalent securities Correct answer.
  2. A repo carries no counterparty credit exposure
  3. A repo can only be executed with a central bank
  4. A repo transfers full legal ownership with no obligation to return the securities

Explanation

A repo is economically a collateralised loan: cash is exchanged for securities with a commitment to reverse the transaction at a set price and date. Legal title may pass, but the repurchase obligation defines the structure.

Question 13Financial Markets Environment

An FX swap involves which combination of transactions?

  1. Two separate spot transactions in different currency pairs
  2. An option purchase combined with a spot sale
  3. A forward purchase with no near-date leg
  4. A spot purchase against a forward sale of the same currency pair Correct answer.

Explanation

An FX swap pairs a near-date leg with a far-date leg in the same currency pair, typically spot against forward. It is used to manage short-term funding and liquidity rather than to take a directional view.

Question 14Financial Markets Environment

A dealer quotes a spot USD/CHF rate of 0.9050/0.9055 and a one-month swap of 10/12 points. At what rate would a client buy USD one month forward?

  1. 0.9043
  2. 0.9040
  3. 0.9067 Correct answer.
  4. 0.9060

Explanation

The forward ask equals the spot ask plus the swap offer point. Adding 12 points to 0.9055 gives 0.9067, the rate at which the client buys USD forward.

Question 15Financial Markets Environment

Which statement about the role of a custodian in the securities market is correct?

  1. The custodian lends to the issuer at a fixed spread
  2. The custodian sets the official closing price of listed securities
  3. The custodian holds assets and processes corporate actions and settlement for clients Correct answer.
  4. The custodian underwrites new issues on behalf of the issuer

Explanation

Custodians safekeep client assets and handle settlement, income collection and corporate actions. They do not underwrite issues, set prices or lend to issuers in that capacity.

Question 16Financial Markets Environment

A bank's assets are largely floating-rate while its liabilities are fixed-rate. Which risk is most directly created?

  1. The bank is exposed to currency translation risk
  2. The bank is exposed to rising rates compressing its margin Correct answer.
  3. The bank faces no interest rate risk because assets and liabilities match
  4. The bank benefits if rates fall

Explanation

Floating-rate assets reprice with market rates while fixed-rate liabilities do not. If rates rise, funding cost stays fixed but asset yields rise, and if rates fall the margin narrows; the mismatch creates interest rate risk either way, with the described structure exposed to a fall in income when rates decline.

Question 17Financial Markets Environment

What is the primary purpose of a central securities depository (CSD)?

  1. To provide settlement and safekeeping of securities in dematerialised form Correct answer.
  2. To act as lender of last resort to banks
  3. To quote two-way prices in government bonds
  4. To set margin requirements for exchange-traded derivatives

Explanation

A CSD holds securities in book-entry form and operates the settlement infrastructure for trades. It does not make markets, set derivatives margin or lend to banks.

Question 18Financial Markets Environment

A dealer expects the yield curve to steepen, with short rates falling and long rates rising. Which position best expresses this view?

  1. Buy short-dated bonds and sell long-dated bonds Correct answer.
  2. Sell short-dated bonds and buy long-dated bonds
  3. Sell both short-dated and long-dated bonds
  4. Buy both short-dated and long-dated bonds

Explanation

A steepener profits when the spread between long and short yields widens. Buying the short end gains from falling short yields while selling the long end gains from rising long yields.

Question 19Financial Markets Environment

Which factor most directly determines the forward points in a currency pair?

  1. The trading volume in the pair
  2. The credit rating of the counterparties
  3. The interest rate differential between the two currencies Correct answer.
  4. The spot exchange rate level alone

Explanation

Forward points reflect the interest rate differential between the two currencies over the forward period, via covered interest parity. Spot level, counterparty credit and volume do not determine the points.

Question 20Financial Markets Environment

A trader observes that three-month EURIBOR is 3.50% and the three-month EUR/USD forward points imply an annualised premium of 2.00%. What does this suggest about relative three-month USD rates?

  1. USD rates are approximately 2.00%
  2. USD rates are approximately 5.50% Correct answer.
  3. USD rates are approximately 1.50%
  4. USD rates are approximately 3.50%

Explanation

By covered interest parity, the forward premium on the base currency equals the foreign rate minus the domestic rate. A 2.00% premium on EUR implies USD rates exceed EUR rates by 2.00%, giving about 5.50%.

Question 21Financial Markets Environment

A bank has a positive gap in the one-to-three-month bucket. Which outcome would reduce its net interest income relative to plan?

  1. Rates rising more than implied by the forward curve
  2. Rates falling more than implied by the forward curve Correct answer.
  3. A parallel upward shift in the curve
  4. A steepening with short rates unchanged

Explanation

A positive gap means rate-sensitive assets reprice before liabilities, so income rises when rates increase and falls when rates decline. A fall larger than the curve implies therefore erodes net interest income.

Question 22Financial Markets Environment

Under Basel III liquidity standards, which assets qualify for inclusion in the stock of high-quality liquid assets (HQLA) at Level 1?

  1. Central bank reserves and high-quality government securities Correct answer.
  2. Residential mortgage-backed securities rated AA
  3. Corporate bonds rated BBB
  4. Listed equities with deep secondary markets

Explanation

Level 1 HQLA comprises the most liquid, lowest-risk assets: central bank reserves and securities issued or guaranteed by sovereigns, central banks or similar bodies with high credit quality. Equities, BBB corporates and RMBS fall into lower categories or are excluded.

Question 23Financial Markets Environment

An FX dealer quotes a client a spot price and simultaneously hedges in the market. If the dealer's hedge is executed at a worse rate than the client price, what has occurred?

  1. The dealer has eliminated all market risk
  2. The dealer has created a forward position
  3. The dealer has captured a positive spread
  4. The dealer has incurred a loss on the round trip Correct answer.

Explanation

If the hedging rate is less favourable than the rate given to the client, the dealer loses on the combined transaction. Spread capture requires the hedge to be executed at a better rate than the client price.

Question 24Financial Markets Environment

A dealer observes that the one-year USD/JPY forward points are negative. Which interpretation is most consistent with covered interest parity?

  1. The market expects a JPY appreciation
  2. The spot rate is expected to fall by the market
  3. USD interest rates are higher than JPY rates
  4. USD interest rates are lower than JPY rates Correct answer.

Explanation

Negative forward points on USD/JPY mean the dollar trades at a forward discount to the yen, which under covered interest parity reflects lower USD interest rates relative to JPY. Forward points reflect rate differentials, not forecasts.

Question 25Financial Markets Environment

Which statement best explains why a central bank's collateral framework matters for repo market functioning?

  1. It sets the coupon on all outstanding government bonds
  2. It determines which assets counterparties may pledge in exchange for central bank liquidity Correct answer.
  3. It fixes the exchange rate for the domestic currency
  4. It guarantees the solvency of all commercial banks

Explanation

The collateral framework specifies eligible assets, haircuts and margins for central bank operations, which shapes how repo participants value and use collateral. It does not set coupons, fix exchange rates or guarantee solvency.

Question 26Financial Markets Environment

In the foreign exchange market, which pair is conventionally quoted with the US dollar as the base currency?

  1. AUD/USD
  2. GBP/USD
  3. EUR/USD
  4. USD/JPY Correct answer.

Explanation

Market convention sets the dollar as base currency against most currencies, so USD/JPY is quoted as the number of yen per dollar. The euro, sterling and Australian dollar are exceptions where the dollar is the terms currency. This convention determines which side of the quote a dealer shows first.

Question 27Financial Markets Environment

A money market instrument issued at a discount and redeemed at face value, with a maturity of less than one year, is best described as which type of security?

  1. A treasury bill Correct answer.
  2. A floating rate note
  3. A coupon-bearing note
  4. A convertible bond

Explanation

Treasury bills and similar discount instruments pay no coupon; the investor's return comes from buying below face value and receiving par at maturity. Coupon-bearing notes, convertibles and floating rate notes all pay periodic interest. The discount mechanism is what distinguishes a bill from a bond.

Question 28Financial Markets Environment

Which body sets the official interest rates for the euro area?

  1. The European Investment Bank
  2. The European Central Bank Correct answer.
  3. The European Securities and Markets Authority
  4. The European Banking Authority

Explanation

Monetary policy for the euro area is the responsibility of the European Central Bank, which sets its policy rates through its Governing Council. The EBA and ESMA are supervisory and regulatory bodies without a monetary policy mandate. The European Investment Bank is a lending institution, not a central bank.

Question 29Financial Markets Environment

In the interbank market, a bank that lends cash overnight to another bank typically does so against what arrangement?

  1. A guarantee from the borrower's sovereign
  2. A commitment to repurchase at a fixed future price
  3. A pledge of the borrower's equity shares
  4. An unsecured loan based on the borrower's credit standing Correct answer.

Explanation

Unsecured interbank lending, such as the classic overnight cash market, relies on the borrower's creditworthiness and is priced off reference rates. A repurchase commitment describes a repo, which is a secured transaction. Equity pledges and sovereign guarantees are not standard features of unsecured cash lending.

Question 30Financial Markets Environment

Which instrument is a short-term debt security issued by a company to raise working capital, typically sold at a discount and maturing within 270 days?

  1. Commercial paper Correct answer.
  2. A debenture
  3. A preference share
  4. A medium-term note

Explanation

Commercial paper is unsecured short-term corporate debt sold at a discount, usually with maturities of a few days to 270 days. Medium-term notes and debentures are longer-dated debt, and preference shares are equity-like instruments. The short maturity and discount pricing identify commercial paper.

Question 31Financial Markets Environment

Which statement correctly describes the settlement date convention T+2 in the spot foreign exchange market?

  1. The trade settles on the trade date itself
  2. The trade settles on the second calendar day after the trade date
  3. The trade settles two business days after the trade date Correct answer.
  4. The trade settles two weeks after the trade date

Explanation

Spot FX conventionally settles two business days after the trade date, counting business days in both relevant currency centres. Calendar days are not used because weekends and holidays would distort the value date. Same-day and next-day settlement are separate conventions known as value today and value tomorrow.

Question 32Financial Markets Environment

A dealer quotes a two-way price of 99.50/99.55 on a bond. Which price would a client selling the bond to the dealer receive?

  1. 99.525
  2. 99.55
  3. 99.50 Correct answer.
  4. 100.00

Explanation

In a two-way price the dealer buys at the lower bid and sells at the higher offer, so a client selling receives the bid of 99.50. The spread is the dealer's compensation for making the market. The midpoint and par value are not executable prices in this quote.

Question 33Financial Markets Environment

Which term describes the process by which a bank matches its assets and liabilities so that interest rate exposure is minimised?

  1. Collateral transformation
  2. Asset-liability management Correct answer.
  3. Credit scoring
  4. Securitisation

Explanation

Asset-liability management is the discipline of coordinating the maturity, repricing and rate characteristics of assets and liabilities to control interest rate risk. Credit scoring assesses borrower default risk, securitisation pools assets for sale, and collateral transformation swaps one collateral type for another. Only ALM addresses the matching objective described.

Question 34Financial Markets Environment

A corporate treasurer expects to receive USD 10 million in three months and wants to lock in the exchange rate now. Which transaction achieves this?

  1. Buy a call option on the home currency struck at today's spot rate
  2. Buy USD against the home currency in the spot market today
  3. Enter a three-month interest rate swap in the home currency
  4. Sell USD forward against the home currency for settlement in three months Correct answer.

Explanation

A forward sale of the receivable currency fixes the rate at which the dollars will be converted when they arrive. A spot purchase today would require immediate funding and would not hedge the future receipt. An option on the home currency and an interest rate swap do not lock the conversion rate of the incoming dollars.

Question 35Financial Markets Environment

A dealer quotes spot USD/JPY at 148.20/148.25 and a three-month swap of 45/50 points. At what rate would a client buy USD against JPY for value three months forward?

  1. 147.75
  2. 148.30
  3. 148.75 Correct answer.
  4. 148.70

Explanation

A client buying dollars forward pays the dealer's forward offer, which is the spot offer plus the offer side of the swap points. Adding 50 points to 148.25 gives 148.75. The bid side of spot and the bid side of the points apply to a client selling dollars forward.

Question 36Financial Markets Environment

A bank's one-year fixed-rate assets are funded by three-month deposits. Which risk does this mismatch create?

  1. Repricing risk arising from a liability repricing before the asset Correct answer.
  2. Liquidity risk arising from the asset maturing before the liability
  3. Credit risk arising from the borrower defaulting
  4. Operational risk arising from settlement failure

Explanation

Short-term deposits reprice before the longer fixed asset, so a rise in deposit rates compresses the spread and creates repricing risk. This is a classic refinancing mismatch within interest rate risk in the banking book. Credit and operational risk are distinct categories unrelated to the maturity structure described.

Question 37Financial Markets Environment

Which feature most clearly distinguishes a foreign exchange option from a foreign exchange forward?

  1. The option requires no premium to be paid
  2. The option can only be traded on an exchange
  3. The option gives the holder a right without an obligation to transact Correct answer.
  4. The option is always settled on the trade date

Explanation

An option confers a right, not an obligation, so the buyer can let it expire if the market moves against the strike. A forward is a binding commitment for both parties. This asymmetry is why the option buyer pays a premium, and the right-versus-obligation distinction is the defining feature.

Question 38Financial Markets Environment

A bank holds a portfolio of government bonds and wants temporary cash while retaining the bonds' economic exposure. Which transaction achieves this?

  1. A bond swap into a different issuer
  2. A forward sale of the bonds for settlement in one year
  3. An outright sale of the bonds with no repurchase agreement
  4. A repurchase agreement pledging the bonds as collateral Correct answer.

Explanation

In a repo the bank sells the bonds and agrees to repurchase them at a later date, raising cash while keeping the economic exposure. An outright sale transfers the exposure permanently, and a bond swap changes the issuer exposure. A forward sale also transfers the exposure at a future date without raising cash today.

Question 39Financial Markets Environment

Which statement best describes the function of a clearing house in a derivatives market?

  1. It sets the official interest rate for the market
  2. It acts as central counterparty and guarantees performance of trades Correct answer.
  3. It lends cash to participants against government bonds
  4. It provides investment advice to retail clients

Explanation

A clearing house interposes itself between counterparties, becoming buyer to every seller and seller to every buyer, and manages default through margin. This novation removes bilateral counterparty risk. Setting rates, lending against bonds and advising clients are roles of other institutions.

Question 40Financial Markets Environment

A dealer expects the Bank of England to cut rates faster than the European Central Bank over the next six months. Which position best expresses this view?

  1. Buy GBP against EUR forward for six months
  2. Buy a GBP call option struck at the current forward rate
  3. Sell GBP against EUR forward for six months Correct answer.
  4. Buy EUR against GBP spot and hold it unhedged

Explanation

Faster rate cuts in the UK than the euro area should weaken sterling relative to the euro, so selling GBP forward profits if that happens. Buying sterling forward or holding euro spot bets the opposite way. A sterling call option benefits from sterling strength, which contradicts the view.

Question 41Financial Markets Environment

Which factor primarily explains why a bond's price falls when market yields rise?

  1. Future cash flows are discounted at a higher rate Correct answer.
  2. The issuer's credit rating automatically improves
  3. The bond's maturity date is brought forward
  4. The bond's coupon is reset to a lower level

Explanation

A bond's price is the present value of its future cash flows, so a higher discount rate reduces that present value. Coupons on fixed-rate bonds are not reset, and credit rating or maturity changes are unrelated to the yield move described. Duration measures the sensitivity of this price-yield relationship.

Question 42Financial Markets Environment

A bank reports a positive cumulative gap in the six-to-twelve-month bucket. If interest rates fall during that period, what is the expected effect on net interest income?

  1. Net interest income rises
  2. Net interest income falls Correct answer.
  3. Net interest income becomes negative
  4. Net interest income is unchanged

Explanation

A positive gap means rate-sensitive assets exceed rate-sensitive liabilities in that bucket, so falling rates reduce interest income more than interest expense. The reverse holds for a negative gap. The magnitude depends on the size of the gap and the rate move.

Question 43Financial Markets Environment

Which statement correctly describes the relationship between a central bank's policy rate and short-term money market rates?

  1. Policy rate changes are transmitted to money market rates through liquidity operations and expectations Correct answer.
  2. Money market rates are fixed by commercial banks in a daily auction
  3. Money market rates are set independently and never respond to policy rates
  4. Policy rates apply only to long-dated government bonds

Explanation

Central banks influence short-term rates by setting the price of reserve provision and managing liquidity, which anchors expectations across the money market curve. Transmission is not instantaneous or perfect but is the core mechanism of monetary policy. Policy rates are not limited to long bonds and are not set by a commercial bank auction.

Question 44Financial Markets Environment

A dealer quotes a client a spot rate and hedges immediately, but the hedge executes at a worse price than quoted. Which risk has the dealer borne?

  1. Settlement risk from the client's payment
  2. Market risk from holding an unhedged position
  3. Legal risk from documentation errors
  4. Execution or slippage risk between quote and hedge Correct answer.

Explanation

The gap between the quoted price and the price achieved on the offsetting trade is execution or slippage risk, a form of market risk incurred during the hedging interval. The dealer is not left unhedged once the hedge is complete. Settlement and legal risks concern different failures.

Question 45Financial Markets Environment

Which instrument gives the holder the right, but not the obligation, to buy a bond at a specified price on a specified future date?

  1. A repo
  2. A bond call option Correct answer.
  3. A bond future
  4. An interest rate swap

Explanation

A call option on a bond gives the buyer the right to purchase the underlying at the strike, exercisable at the holder's discretion. A future is a binding obligation, a repo is a secured financing transaction, and a swap exchanges interest payments. Only the option embeds the right without obligation.

Question 46Financial Markets Environment

A bank's liquidity coverage ratio requires it to hold sufficient high-quality liquid assets to cover net cash outflows over which stress horizon?

  1. One year
  2. Thirty calendar days Correct answer.
  3. Ninety calendar days
  4. Seven calendar days

Explanation

The Basel III liquidity coverage ratio requires a stock of high-quality liquid assets sufficient to cover net cash outflows under a stress scenario over thirty calendar days. The net stable funding ratio addresses the one-year horizon. Seven and ninety days are not the LCR stress horizon.

Question 47Financial Markets Environment

A trader wants to profit from an expected fall in the credit quality of a single corporate issuer without owning its bonds. Which instrument is designed for this?

  1. An FX forward on the issuer's home currency
  2. A repo on the issuer's bonds
  3. A credit default swap bought as protection Correct answer.
  4. A government bond future

Explanation

Buying credit default swap protection pays out if the reference entity defaults or a credit event occurs, so the position gains as the issuer's credit deteriorates. A government bond future, an FX forward and a repo do not reference the issuer's creditworthiness. The CDS isolates credit risk from the cash bond.

Question 48Financial Markets Environment

A dealer observes that the one-year USD/CHF forward points are strongly negative. Assuming covered interest parity, which explanation is most consistent?

  1. Swap market liquidity has dried up entirely
  2. The market expects the franc to weaken sharply
  3. USD interest rates are higher than CHF interest rates Correct answer.
  4. USD interest rates are lower than CHF interest rates

Explanation

Under covered interest parity, the currency with the higher interest rate trades at a forward discount, producing negative forward points. Higher USD rates than CHF rates therefore imply negative USD/CHF points. Expectations of franc weakness and liquidity conditions are separate from the parity relationship.

Question 49Financial Markets Environment

A bank's trading book holds a large position in a corporate bond that it believes is undervalued but hard to sell quickly. Which risk is most relevant to the position?

  1. Sovereign risk arising from a foreign government's action
  2. Settlement risk arising from the counterparty's failure to deliver
  3. Liquidity risk arising from the difficulty of exiting the position without moving the price Correct answer.
  4. Operational risk arising from trade capture errors

Explanation

Market liquidity risk is the risk that a position cannot be closed quickly at or near the prevailing mid price without adverse price impact. The other options concern settlement failure, operational process failure and sovereign action, none of which is created by the difficulty of exiting the bond.

Question 50Financial Markets Environment

A bank funds a long-dated fixed-rate loan with short-term wholesale borrowing and hedges the interest rate risk with a pay-fixed interest rate swap. Which risk remains unaddressed by the swap?

  1. The risk that wholesale funding cannot be rolled over at maturity Correct answer.
  2. The risk that the borrower repays early at par
  3. The risk that the swap counterparty demands variation margin
  4. The risk that the loan's fixed rate falls below the swap rate

Explanation

An interest rate swap converts the fixed exposure to floating but does not provide cash at the funding maturity, so rollover or refinancing risk remains. The swap hedges the rate mismatch rather than the funding availability. Early repayment and margin calls are distinct considerations.