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CFA Level I · CFA Level I Exam · Introduction to Geopolitics

A country facing a rival's sanctions wants to reduce the effectiveness of financial tools aimed at it. Which response is most likely to reduce its vulnerability over time?

Building alternative payment systems and diversifying reserves away from the rival's currency best reduces vulnerability. Financial sanctions depend on the target's reliance on the sanctioner's currency and networks. More settlement in that currency or more borrowing in it would deepen exposure instead.

  1. AIncrease its reliance on the rival's currency for trade settlement
  2. BBuild alternative payment systems and diversify reserve holdings away from the rival's currencyCorrect
  3. CRaise its external borrowing denominated in the rival's currency

Explanation

Financial sanctions work through dependence on the sanctioning state's currency and payment networks. Alternative payment channels and diversified reserves lessen that exposure. The other options increase dependence and so raise vulnerability.

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