Chartered Financial Analyst (CFA) Practice Exam Level 2

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What does the MRR - OIS Spread indicate?

Market Volatility
Indicator of Risk / Liquidity of Money Market Securities
Interest Rate Change
Stock Market Performance

The correct answer is: Indicator of Risk / Liquidity of Money Market Securities

The MRR - OIS Spread, which stands for the Market Repo Rate minus the Overnight Indexed Swap rate, serves as an important indicator of the risk and liquidity associated with money market securities. A wider spread typically suggests heightened perceived risk or diminished liquidity, indicating that market participants may require a higher premium for taking on the additional perceived risk in the money markets. Conversely, a narrower spread can indicate improved liquidity and lower risk perception. Understanding this spread is critical for market participants as it reflects the conditions in the financial markets, particularly concerning short-term funding. Factors such as changes in credit risk, liquidity conditions, and overall market sentiment can impact this spread, making it a useful tool for assessing the health and stability of money market instruments. While other options like market volatility, interest rate changes, and stock market performance are significant financial indicators, they do not specifically relate to the nuances of the MRR - OIS spread. This spread is distinctively tied to money market liquidity and risk assessment rather than broader market dynamics.