Question #9
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 3
Status: Correct
Correct Answer: A
Question
Settlement risk is most likely to be a concern for:
Answer Choices:
A. Exchange traded notes
B. ETF investors where the ETF sponsors lend securities to short sellers for a fee
C. ETFs using OTC derivative contracts
Explanation
ETFs using OTC derivative contracts as part of their strategy expose investors to the
settlement risk of such contracts. Credit risk of defaulting security borrowers is a security
lending risk and is different from settlement risk. Exchange traded notes may expose ETN
investors to counterparty risk.