Contagion

The spread of a financial crisis from one country or market to others, often those investors see as similar, even where their own fundamentals are only moderately weak.

Where you will meet it

Contagion appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Set out the signals that a currency crisis may be coming
  CFA Level II · Economics

  “Contagion from crises in similar economies can trigger an attack even when fundamentals are only moderately weak.”

• Explain the dangers electronic trading creates and the tools regulators use to contain them
  CFA Level III · Portfolio Construction

  “Risks include runaway or faulty algorithms that send erroneous orders, fat-finger errors, excessive message traffic that overloads systems, flash crashes when liquidity providers withdraw simultaneously, and systemic contagion across linked venues.”

• Explain the difficulties of managing currency exposure in emerging markets
  CFA Level III · Derivatives and Risk Management

  “Correlations across these currencies jump in a crisis, so diversification fails as contagion spreads.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary