ACCA Advanced Financial Management (AFM) Practice Exam

What effect do low offer prices generally have on traded prices?

1. Lower traded prices

2. No significant difference

3. Higher traded prices

4. Higher risks for investors

The correct answer is: Higher traded prices

Low offer prices often lead to higher traded prices due to the underlying principle of supply and demand in the financial markets. When investors see lower offer prices, it can create a sense of urgency or perceived opportunity, driving demand up as buyers rush to purchase at these lower prices. This increased demand can lead to competition among buyers, which in turn pushes up the traded prices as investors are willing to pay more to secure their positions. Additionally, low offer prices can signal to the market that an asset might be undervalued or that the potential for significant returns is high. This perception can attract more buyers, resulting in higher traded prices. The relationship between offer prices and market psychology plays a critical role. As investors react to low offers, they may anticipate that these prices will not last and thus may push traded prices higher in a bid to capitalize on perceived market inefficiencies or future growth prospects. In the dynamics of a market, these factors combine to create upward pressure on the traded prices when low offers are present.