IFIC Mutual Funds Licensing Practice Exam · Question
The primary mechanism that helps keep an ETF's market price close to its Net Asset Value (NAV) is:
The creation and redemption mechanism, involving Authorized Participants (APs) who can create or redeem large blocks of ETF units directly with the ETF provider
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Question: The primary mechanism that helps keep an ETF's market price close to its Net Asset Value (NAV) is:
Answer options:
- The exchange's daily price limits.
- The fund manager's active trading of the underlying securities. ✅ The creation and redemption mechanism involving authorized participants.
- Regulatory requirements mandating price alignment.
Correct answer: The creation and redemption mechanism involving authorized participants.
Explanation: The creation and redemption mechanism, involving Authorized Participants (APs) who can create or redeem large blocks of ETF units directly with the ETF provider, acts as an arbitrage mechanism. This process helps to align the ETF's market price with its underlying NAV, as per the structure of ETFs.
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