Download Foreign Exchange Management

School of Distance Education
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
(2011 Admn. onwards)
VI Semester
B.Com-BANKING -SPECIALISATION
FOREIGN EXCHANGE MANAGEMENT
Question Bank & Answer Key
Choose the correct Answer from the bracket.
1. Maintaining a foreign currency account is helpful to
A. Avoid transaction cost.
B. Avoid exchange risk.
C. Avoid both transaction cost and exchange risk.
D. Avoid exchange risk and domestic currency depreciation
2. India’s foreign exchange rate system is?
A. Free float
B. Managed float
C. Fixed .
D. Fixed target of band
3. Hedging transaction is indicated by
A. Transactions in odd amounts
B. Presentation of documentary support.
C. Frequency of such transactions.
D. None of the above.
4. The acronym SWIFT stands for
A. Safety Width In Financial Transactions.
B. Society for Worldwide International Financial Telecommunication.
C. Society for Worldwide Interbank Financial Telecommunication.
D. Swift Worldwide Information for Financial Transaction.
5. Indirect rate in foreign exchange means
A. The rate quoted with the units of home currency kept fixed.
B. The rate quoted with units of foreign currency kept fixed.
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C. The rate quoted in terms of a third currency.
D. None of the above.
6. The maxim 'buy low; sell high' is applicable for
A. Quotation of Pound-Sterling.
C. Direct rates.
B. Indirect rates.
D. USDOLLARS.
7. India is facing continuous deficit in its balance of payments. In the foreign exchange
market rupee is expected to
A. Depreciate.
B. Appreciate.
C. Show no specific tendency.
D. Depreciate against currencies of the countries with positive balance of payment and
appreciate against countries with negative balance of payment.
8. The effect of speculation on exchange rate is
A. It causes violent fluctuations in exchange rate.
B. It aggravates the market trends.
C. Either or both of A and B.
D. Neither A nor B.
9. The demand for domestic currency in the foreign exchange market is indicated by the
following transactions in balance of payment
A. Export of goods and services
B. Import of goods and services.
C. Export of goods and services and capital inflows.
D. Import of goods and services and capital outflows.
10. If PPP holds
A. The nominal exchange rate will not change.
B. The real exchange rate will not change.
C. Both real and nominal exchange rates will not change.
D. Both real and nominal exchange will move together
11.The forward US dollar is quoted at premium against Indian Rupees. This implies A.
Money market rates are higher in India than in the US.
B. Money market rates are lower in India than in the US.
C. Market yield is higher in US than in India.
D. Dollar has a better value than Indian Rupee.
12. Determination of forward rates is explained by
A. Uncovered interest arbitrage.
B. Purchasing power parity theory.
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C. Demand and Supply for spot currency.
D. None of the above.
13. According to International Fisher Effect
A. Forward Premium for a currency indicates its depreciation in future.
B. Forward Premium for a currency indicates its appreciation in future.
C. Forward Rates and spot rates are not linked
D. Forward Rates are based on expected future spot rates.
14. Cash and carry arbitrage explains the determination of
A. Forward Rates for currencies.
B. Spot rates for currencies.
C. Both forward and spot rates for currencies.
D. Penalty for non-execution of forward contracts.
15. LIBOR is:
A. the interest rate commonly charged for loans between banks.
B. the average inflation rate in European countries.
C. the maximum loan rate ceiling on loans in the international money
D. the maximum interest rate offered on bonds that are issued in London.
16. The margin for a currency future should be maintained with the clearinghouse by
A. The buyer.
B. The seller.
C. Both the buyer and the seller.
D. Either the buyer or the seller as per the agreement between them.
17. The marking to market in respect of a currency future refers to
A. Putting up for sale specific lot of futures.
B. Adjusting the margin money of buyer and seller to reflect the current value of
futures
C. Quoting rates for different maturities.
D. Allotting futures among different brokers.
18. For the balance kept in the margin account for futures
A. Interest is paid at riskless rate.
B. Interest is paid at LIBOR rate
C. Interest is paid for the surplus over the required minimum.
D. No interest is paid.
19. A feature of currency option that distinguishes it from other derivatives is
A. It carries premium to be paid up front.
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B. It is optional to enter into the contract.
C. The buyer has only right, but no obligation to execute the contract
D. The seller has the right, but no obligation to execute the contract.
20. The following statement with respect to currency option is wrong
A. Call option will be used by exporters.
B. Put option gives the buyer the right to sell the foreign currency.
C. Foreign currency- Rupee option is available in India.
D. An American option can be executed on any day during its currency.
21. For contingency exposure of foreign exchange, the best derivative that can be used
to hedge is
A. Forwards.
C. Options.
B. Futures.
D. Swaps.
22. The strike price under an option is
A. The price at which the option is auctioned
B. The exchange rate which the currencies are agreed to be exchanged under the
contract
C. . Lower of the market price and the agreed price
D. None of the above
23. An option at-the-money when
A. The strike price is greater than the spot price, in the case of a call option.
B. The strike price is greater than spot price, in the case of a put option.
C. The option has a ready market.
D. The strike price and the spot price are the same.
24. Where an option is out of the money
A. The premium will be refunded to the buyer.
B. The buyer is unable to take up the contract
C. The seller gains to the extent of the premium received.
D. No further purchase by the buyer is permitted.
25. Banks permitted to run option book is required to fulfill the condition of
A. Continuous profit for at least three years.
B. Minimum CRAR of 9%.
C. Minimum net worth of Rs.200 crores.
D. All the above.
26. Zero coupon swap is an arrangement
A. Involving exchange of zero coupon bonds.
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B. Whereby only one party makes payment periodically.
C. Whereby one of the counter-parties makes payment in lump sum instead of
periodically.
D. None of the above.
27. The acronym CIRCUS stands for
A. Current Interest Rate Swap.
B. Circular Currency Swap.
C. Combined Income Range Currency Swap.
D. Combined Interest Rate and Currency Swap.
28. A forward rate agreement helps the user to
A. Fix the cost of borrowing.
C. Cover exchange risk
B. Reduce the cost of borrowing.
D. Avail tax benefit
29. The swap arrangement where principal amounts are not exchanged, but periodical
payments will be a
A. Currency swap
C. Interest rate swap.
B. Cross currency interest swap
D. Non-Financial swap.
30. An interest rate cap is a series of
A. Call options
C. Periodical payments
B. Put options.
D. Differential payments.
31. FRAs can’t+ be used for
A. Hedging.
C. Speculating.
B. Arbitraging.
D. Any of the Above.
32. The true cost of hedging transaction exposure by using forward market is
A. Difference between agreed rate and spot rate at the time of entering into contract.
B. Difference between agreed rate and spot rate on the due date of contract
C. Forward premium / discount annualized.
D. None of the above.
33. Hedging with options is best recommended for
A. Hedging receivables.
C. Hedging contingency exposures.
B. Hedging payables.
D. Hedging foreign currency loans
34. A firm operating in India cannot hedge its foreign currency exposure through
A. Forwards.
C. Options.
B. Futures.
D. None of the above.
35. Foreign currency exposures can be avoided by
A. Entering into forward contracts.
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B. Denominating the transaction in domestic currency.
C. Exposure netting
D. Maintaining foreign currency accounts.
36. The following method does not result in sharing of an exchange risk between
importer and exporter
A. Denominating in a third currency.
B. Denominating partly in importer's currency and partly in exporter's currency.
C. Entering a exchange rate clause in the contract.
D. Denominating in domestic currency.
37. Leading refers to
A. Advancing of receivables.
B. Advancing of payables.
C. Advancing payments either receivables or payables.
D. Advancing of receivables and delaying of payables.
38. Translation exposure arises in respect of items translated at
A. Current rate.
C. Average rate.
B. Historical rate.
D. All of the above.
39. Translation loss is
A. A loss to the parent company.
C. A notional loss.
B. A loss to the subsidiary company.
D. An actual loss.
40. The translation exposure is positive when
A. Exposed assets are lesser than exposed liabilities.
B. Exposed liabilities are lesser than exposed assets.
C. The exposure results in profit.
D. There are no liabilities.
41. For the purpose of translations, current rate refers to
A. The rate current at the time of transaction.
B. The rate prevailing on the date of the balance sheet.
C. The rate prevailing on the date of preparation of the balance sheet.
D. The spot rate
42. Exposed assets are those translated at
A. Historical rate.
C. Current rate.
B. Average rate.
D. Current rate or average rate.
43. This is not established method of translation
A. Current rate method.
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C. Temporary method.
D. Current/Non-current method
44. A positive exposure will lead to when the currency of the subsidiary company
appreciates.
A. Translation gain.
C. Exchange gain.
B. Translation loss
D. Exchange loss.
45. Translation loss may occur when
A. Exposed assets exceed exposed liabilities and foreign currency appreciates.
B. Exposed assets exceed exposed liabilities and foreign currency depreciates.
C. The subsidiary's balance sheet shows a loss.
D. The foreign currency depreciates.
46. The following method cannot be used for managing translation exposure
A. Forward contract.
C. Exposure netting.
B. Option contract
D. Leading and lagging.
47. Economic exposure does not deal with
A. Changes in real exchange rates.
C. Expected exchange rate changes.
B. Future cash flow of the firm
D. None of the above.
48. The __________ refers to the orderly relationship between spot and forward
currency exchange rates and the rates of interest between countries.
A. one-price rule
C. purchasing-power parity
B. interest-rate parity
D. exchange-power parity
49. The __________ is especially well suited to offer hedging protection against
transactions risk exposure.
A. forward market
C. transactions market
B. spot market
D. inflation-rate market
50. A multinational company that is faced with mild interference up to complete
confiscation of all assets is encountering__________.
A. translation risk exposure
C. political risk exposure
B. transactions risk exposure
D. a very bad day
51. Which of the following is not an example of an international trade draft?
A. Time draft.
B. Sight draft.
C. Both the first and second answers are
correct
D. Usance draft
52. A group of European countries have formed a union and created a common
currency known as __________.
A. the EU currency
C. the EMU
B. the European Union
D. the Euro
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53. The forward exchange rate __________.
A. is the rate today for exchanging one currency for another for immediate delivery
B. is the rate today for exchanging one currency for another at a specific future date
C. is the rate today for exchanging one currency for another at a specific location on a
specific future date
D. is the rate today for exchanging one currency for another at a specific location for
immediate delivery
54. The spot exchange rate __________.
A. is the rate today for exchanging one currency for another for immediate delivery
B. is the rate today for exchanging one currency for another at a specific future date
C. is the rate today for exchanging one currency for another at a specific location on a
specific future date
D. is the rate today for exchanging one currency for another at a specific location for
immediate delivery
55. What are the forms of assistance that the World Bank provides to its members? A.
Technical and financial
B. Political and financial
C. Political and economic
D. Technical and military
56. The World Bank Group is made up of how many organisations?
A. 3
C. 8
B. 5
D. 10
57. The most liquid asset among the following is?
A. Gold
C. Cash
B. Share
D. land
58. The system operated by the WTO is known as the
A. multilateral trading system
C. ratified system
B. bilateral trading system
D. ungratified system
59. The price at which a market maker is prepared to buy (a currency) or borrow
(money) is termed as
A. spot rate
C. ask price
B. bid rate
D . forward rate
60. A deposit or borrowing domiciled outside the home country of the currency is called
as
A. foreign bond
C. euro currency
B. euro bond
D. domestic bond
61. The price at which a market maker is prepared to sell (a currency) or lend (money)
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A. forward rate
C. bid rate
B. sport rate
D. offer rate
62. Bretton woods agreement arrived at in
A. July 1994
C. June 1960
B. July 1954
D. June 1964
63. A contract that gives the buyer the right to buy commodity or a foreign currency
from the seller at a fixed price is called as
A. put option
C. cross option
B. call option
D. currency swap
64. CIF stands for
A. Cost, interest, freight
C. Cost, insurance, freight
B. Cost, income, freight
D. Customs, insurance, freight
65. The market where long term securities (shares, bonds, etc) are bought and sold is
called as
A. money market
C. primary market
B. capital market
D. secondary market
66. A bank located usually in another country that provides service for another bank is
A. Foreign bank
C. Correspondent bank
B. Central bank
D. World bank
67. _______________ is a process of taking advantage of differentials in interest rates
of two currencies while eliminating exchange risk.
A. Hedging
C. Covered – Interest Arbitrage
B. Insurance
D. Exposure
68. Quotation where the price of one unit of foreign currency is given in terms of local
currency units is called as
A. Indirect quotation
C. Open-ended quotation
B. . Direct quotation
D. Close – ended quotation
69. FOB stands for
A. Freight on board
C. Flexible on board
B. Free on board
D. Future on board
70. An operation in order to protect the domestic currency value of an asset or a liability
that is denominated in foreign currency is called as
A. Hedging
C. Indexation
B. Hermes
D. Leading
71. Difference between buying and selling rates in an exchange rate or interest rate
quotation is known as
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A. Strike price
C. Swap points
B. Spread
D. Spot rate
72. The price which one subsidiary or one unit of business charges from another for
selling goods or providing services is
A. Transfer price
C. Spot price
B. Strike price
D. Forward rate
73. The bond that does not pay any interest and issued at a price lower than its
reimbursement value is called as
A. Zero coupon bond
C. Euro bond
B. Coupon bond
D. Domestic bond
74. International Development Association established in
A. 1970
C. 1960
B. 1962
D. 1958
75. International Finance Corporation established in
A. 1956
C. 1966
B. 1960
D. 1970
76. ____________ means using short-term forward contracts to offset “paper” gains
and losses on the long-term assets and liabilities of foreign subsidiaries.
A. Hedging transaction exposure
C. Hedging economic exposure
B. Hedging balance-sheet exposure
D. Hedging cost exposure
77. Which exchange rate theory focuses on the inflation – exchange rate relationship?
A. Interest rate parity
C. Purchasing power parity
B. International Fisher Effect
D. Traditional Model
78. The exchange rate prevailing at a financial reporting date
A. Closing exchange rate
C. Fixed exchange rate
B. Opening exchange rate
D. Fluctuating exchange rate
79. The bank account of a non-resident of a country, where the amount of currency in
the account cannot be transferred to another country is called as
A. Nostro account
C. Foreign account
B. Blocked Account
D. Capital account
80. Funds that cannot be remitted from the subsidiary to the parent due to host
government restrictions is known as
A. Close – ended funds
C. Blocked funds
B. Open – ended funds
D. Restricted funds
81. Exchange rate between currency A and currency B, given the values of currencies A
and B with respect to a third currency is known as
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A. Golden standard
C. Fixed exchange rate
B. Flexible exchange rate
D. Cross exchange rate A
82. Agreement to exchange one currency for another at a specified exchange rate and
date is
A. Currency swap
C. Currency put option
B. Swap points
D. Currency call option
83. Long– term securities denominated in two currencies is called as
A. Euro bond
C. Foreign bonds
B. Dual – currency bonds
D. Euro dollar deposit.
84. Foreign exchange transactions involve monetary transactions
A. among residents of the same country
B. between residents of two countries only
C. between residents of two or more countries
D. among residents of at least three countries
85. A foreign currency account maintained by a bank abroad is its
A. nostro account
C. loro account
B. vostro account
D. foreign bank account
86. Non-resident Bank Accounts’ refer to
A. nostro account
C. accounts opened in offshore centers
B. vostro account
D. foreign bank account
87. The number of nostro accounts that can be maintained by a bank in a particular
currency is
A. One
C. minimum two
B. not exceeding three
D. no such limit
88. Full fledged money changers are authorized to undertake
A. only sale transactions
B. only purchase transactions
C. all types of foreign exchange transactions
D. purchase and sale of foreign currency notes, coins and travelers cheques
89 . IMF augments its resources by borrowing under
A. General arrangements to borrow
C. Trust funds
B. New arrangements to borrow
D. All the above
90. The abbreviations SDR stands for
A. Special Drawing Rights
C. Special Depository Rules
B. Specific Drawing Rights
D. Specific Depository Rules
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91. The value of SDR is
A. equivalent to one US dollar
B. based on value of gold
C. average of the value of US dollar and Euro
D. based on basket of five currencies
92. The term World Bank refers to
A. IBRD
C. Both IBRD and IDA
B. IDA
D. IFC
93 . IBRD lending is not available for
A. middle income countries
C. multilateral agencies
B. low income countries
D. developed countries
94. The eligibility to borrow from IDA is based on
A. relative poverty
B. lack of creditworthiness to borrow on market terms
C. good policy performance
D. all the above
95. Financial products of IFC does not include
A. loans
C. risk management products
B. equity participation
D. none of the above
96. MIGA stands for
A. Multilateral Investment Guarantee Agency
B. Multilateral Institutional and Government Agencies
C. Mutual Interest Guaranteeing Agencies
D. Mutual Institutional and Government Agencies
97. Guarantee provided by MIGA to private investors covers risk of
A. transfer restriction
C. breach of contract
B. expropriation
D. all the above
98. The activities of ADB include
A. project financing
C. both a and b
B. guaranteeing loans
D. risk management products
99. A ‘credit’ in balance of payments indicates
A. Accumulation of bank balances abroad
B. Foreign direct investment received into the country
C. Earning of foreign exchange by the country
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D. Earning of foreign exchange or incurring of liability abroad or decrease in asset
abroad
100. The current account of balance of payments does not include
A. Trade in goods
C. Income on investments
B. Trade in services
D. None of the above
101 . A country has a negative balance of trade. It means the balance of payments on
current account
A. Should also be negative
C. May be positive or negative
B. Should be positive
D. Should be same as balance of trade
102. The Foreign Trade policy was first introduced in the year:
A. 1981.
C. 1992.
B. 1947.
D. 2000.
103. The present share of India’s trade in the world trade is
A. less than 1 per cent.
C. 1.5 per cent.
B. 1.2 per cent.
D. 1.8 per cent.
104. The apex body of the Foreign Trade is:
A. The Central Government.
C. The Ministry of Commerce.
B. The State Government.
D. All the above.
105. The tenure of the Foreign Trade policy is
A. 3 years.
C. 1 year.
B. 5 years.
D. 7 years.
106. The geographically distributed area or zone where the economic laws are more
liberal as compared to other parts of the country is called
A. EOU
C. AEZ.
B. SEZ.
D. FTZ.
107. Islamic nations follow
A. Common law
C. Criminal Law.
B. Civil law.
D. Religious law.
108. What does CCIE stand for?
A. Chief Controller of Imports and Exports.
B. Central Cottage Industries Exports.
C. Control on Cotton Imports and Exports.
D. Commissioner of Central Imports and Exports.
109. The total value of the products and services marketed by a nation is called:
A. Gross Domestic Product.
C. National Income
B. Gross National Product.
D. Per capita income.
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110. To what extent is FDI permitted in the FTWZ?
A. 50%
C. 75%
B. 60%
D. 100%
111. The WTO Agreement related to investment measures is:
A. TRIPS.
C. GATS.
B. TRIMS.
D. TCA.
112. The major players in the foreign exchange market are
A. commercial banks.
B. corporate.
C. exchange brokers.
D. central bank of the country and the Central Government
113. Derivatives can be used by an exporter for managing
A. currency risk.
C. credit risk.
B. cargo risk.
D. business risk.
114. The forward market is especially well-suited to offer hedging protection against
A. translation risk exposure.
C. political risk exposure.
B. transactions risk exposure.
D. taxation
115. The euro is the name for
A. a currency deposited outside its country of origin.
B. a bond sold internationally outside of the country in whose currency
C. the bond is denominated
D. a common European currency.
116. Which of the following are international financial considerations faced by both
small and large MNEs?
A. Currency systems
C. Interest rates
B. Tax systems
D. Exchange rate
117. Strategies in which funds are moved from one MNE operation to another are called
A. funds positioning techniques
C. fronting techniques.
B. arm's length techniques.
D. subsidiary flows.
118. Markets in which funds are transferred from those who have excess funds
available to those who have a shortage of available funds are called
A. commodity markets.
C. derivative exchange markets.
B. fund-available markets.
D. financial markets.
119. The bond markets are important because
A. they are easily the most widely followed financial markets in the United States.
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B. they are the markets where foreign exchange rates are determined.
C. they are the markets where interest rates are determined.
D. they are the markets without risk
120. Most FDI and trade are made by:
A. China, Japan and the US.
C. North America
B. The US, the EU, and Japan
D. ASEAN countries
121. The EU is the major provider of FDI for:
A. Eastern Europe.
C. developing Asian countries
B. South America.
D. all of these regions.
122. Markets in which funds are transferred from those who have excess funds
available to those who have a shortage of available funds are called
A. commodity markets.
C. derivative exchange markets.
B. fund-available markets.
D. financial markets.
123. Increasing interest rates
A. discourage corporate investments.
B. . discourage individuals from saving.
C. encourage corporate expansion.
D. encourage corporate borrowing.
124. Which of the following is not considered a unilateral transfer?
A. foreign aid from one government to another
B. income earned from foreign investments
C. personal gifts to friends in foreign countries
D. donations to foreign countries from non-government
125. An increase in the current account deficit will place _______ pressure on the home
currency value, other things equal
A. upward.
C. no
B. downward
D. upward or downward
126. Which of the following would likely have the least direct influence on a country's
current account?
A. Inflation.
B. National income.
C. Exchange rates
D. A tax on income earned from foreign stocks
127. The primary component of the current account is the:
A. balance of trade.
C. balance of capital market flows
B. balance of money market flows
D. unilateral transfers.
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Answer key:
1-C
2-B
3-D
4-C
5-A
6-C
7-A
8-C
9-C
10-B
11-A
12-D
13-B
14-A
15-D
16-C
17-B
18-D
19-C
20-A
21-C
22-B
23-D
24-C
25-D
26-C
27-D
28-A
29-C
30-A
31-D
32-B
33-C
34-B
35-B
36-D
37-C
38-A
39-C
40-B
41-B
42-C
43-C
44-A
45-B
46-B
47-C
48-B
49-A
50-C
51-C
52-D
53-B
54-A
55-A
56-B
57-C
58-A
59-B
60-C
61-D
62-A
63-B
64-C
65-B
66-C
67-C
68-B
69-B
70-A
71-B
72-A
73-A
74-C
75-A
76-B
77-C
78-A
79-B
80-C
81-D
82-A
83-B
84-C
85-A
86-B
87-D
88-D
89-D
90-A
91-D
92-C
93-C
94-D
95-D
96-A
97-D
98-C
99-D
100-D
101-C
102-C
103-C
104-C
105-B
106-B
107-D
108-A
109-D
110-A
111-D
112-C
113-C
114-C
115-B
116-C
117-A
118-B
119-B
120-D
121-C
122-A
123-D
124-A
125-D
126-A
127-B
©
Reserved
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