B.Com-BANKING -SPECIALISATION

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1 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. Foreign Exchange Management 1

2 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. B. Indirect rates. C. Direct 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. Foreign Exchange Management 2

3 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. Foreign Exchange Management 3

4 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. B. Futures. 22. The strike price under an option is A. The price at which the option is auctioned C. Options. D. Swaps. 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. Foreign Exchange Management 4

5 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. B. Reduce the cost of borrowing. C. Cover exchange risk D. Avail tax benefit 29. The swap arrangement where principal amounts are not exchanged, but periodical payments will be a A. Currency swap B. Cross currency interest swap 30. An interest rate cap is a series of A. Call options B. Put options. 31. FRAs can t+ be used for A. Hedging. B. Arbitraging. C. Interest rate swap. D. Non-Financial swap. C. Periodical payments D. Differential payments. C. Speculating. 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. B. Hedging payables. C. Hedging contingency exposures. D. Hedging foreign currency loans 34. A firm operating in India cannot hedge its foreign currency exposure through A. Forwards. B. Futures. 35. Foreign currency exposures can be avoided by A. Entering into forward contracts. C. Options. D. None of the above. Foreign Exchange Management 5

6 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. B. Historical rate. 39. Translation loss is A. A loss to the parent company. B. A loss to the subsidiary company. 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. C. Average rate. 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. D. All of the above. C. A notional loss. D. An actual loss. 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. B. Average rate. 43. This is not established method of translation C. Current rate. D. Current rate or average rate. A. Current rate method. B. Monetary/Non-monetary method. Foreign Exchange Management 6

7 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. B. Translation loss 45. Translation loss may occur when C. Exchange gain. D. Exchange loss. 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. B. Option contract 47. Economic exposure does not deal with A. Changes in real exchange rates. B. Future cash flow of the firm C. Exposure netting. D. Leading and lagging. C. Expected exchange rate changes. 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 B. interest-rate parity C. purchasing-power parity D. exchange-power parity 49. The is especially well suited to offer hedging protection against transactions risk exposure. A. forward market B. spot market C. transactions 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 B. transactions risk exposure C. political 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 B. the European Union C. the EMU D. the Euro Foreign Exchange Management 7

8 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 B The most liquid asset among the following is? A. Gold B. Share C. 8 D. 10 C. Cash D. land 58. The system operated by the WTO is known as the A. multilateral trading system B. bilateral trading system C. ratified 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 B. bid rate C. ask price D. forward rate 60. A deposit or borrowing domiciled outside the home country of the currency is called as A. foreign bond B. euro bond C. euro currency D. domestic bond 61. The price at which a market maker is prepared to sell (a currency) or lend (money) Foreign Exchange Management 8

9 A. forward rate B. sport rate 62. Bretton woods agreement arrived at in A. July 1994 B. July 1954 C. bid rate D. offer rate C. June 1960 D. June 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 B. call option 64. CIF stands for A. Cost, interest, freight B. Cost, income, freight C. cross option D. currency swap C. Cost, insurance, 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 B. capital market C. primary market D. secondary market 66. A bank located usually in another country that provides service for another bank is A. Foreign bank B. Central bank C. Correspondent 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 B. Insurance C. Covered Interest Arbitrage 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 B.. Direct quotation 69. FOB stands for A. Freight on board B. Free on board C. Open-ended quotation D. Close ended quotation C. Flexible 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 B. Hermes C. Indexation D. Leading 71. Difference between buying and selling rates in an exchange rate or interest rate quotation is known as Foreign Exchange Management 9

10 A. Strike price B. Spread C. Swap points 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 B. Strike price C. Spot 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 B. Coupon bond C. Euro bond D. Domestic bond 74. International Development Association established in A B C D International Finance Corporation established in A B C D 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 B. Hedging balance-sheet exposure C. Hedging economic exposure D. Hedging cost exposure 77. Which exchange rate theory focuses on the inflation exchange rate relationship? A. Interest rate parity B. International Fisher Effect C. Purchasing power parity D. Traditional Model 78. The exchange rate prevailing at a financial reporting date A. Closing exchange rate B. Opening exchange rate C. Fixed 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 B. Blocked Account C. Foreign 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 B. Open ended funds C. Blocked 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 Foreign Exchange Management 10

11 A. Golden standard B. Flexible exchange rate C. Fixed 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 B. Swap points C. Currency put option D. Currency call option 83. Long term securities denominated in two currencies is called as A. Euro bond B. Dual currency bonds C. Foreign 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 B. vostro account 86. Non-resident Bank Accounts refer to A. nostro account B. vostro account C. loro account D. foreign bank account C. accounts opened in offshore centers D. foreign bank account 87. The number of nostro accounts that can be maintained by a bank in a particular currency is A. One B. not exceeding three C. minimum two 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 B. New arrangements to borrow 90. The abbreviations SDR stands for A. Special Drawing Rights B. Specific Drawing Rights C. Trust funds D. All the above C. Special Depository Rules D. Specific Depository Rules Foreign Exchange Management 11

12 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 Foreign Exchange Management 12

13 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 B. Trade in services C. Income on investments 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 B. Should be positive C. May be positive or negative 102. The Foreign Trade policy was first introduced in the year: A B D. Should be same as balance of trade C D The present share of India s trade in the world trade is A. less than 1 per cent. B. 1.2 per cent The apex body of the Foreign Trade is: A. The Central Government. B. The State Government The tenure of the Foreign Trade policy is A. 3 years. B. 5 years. C. 1.5 per cent. D. 1.8 per cent. C. The Ministry of Commerce. D. All the above. C. 1 year. D. 7 years 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 B. SEZ Islamic nations follow A. Common law B. Civil law 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. C. AEZ. D. FTZ. C. Criminal Law. D. Religious law The total value of the products and services marketed by a nation is called: A. Gross Domestic Product. B. Gross National Product. C. National Income D. Per capita income. Foreign Exchange Management 13

14 110. To what extent is FDI permitted in the FTWZ? A. 50% B. 60% C. 75% D. 100% 111. The WTO Agreement related to investment measures is: A. TRIPS. B. TRIMS. C. GATS. D. TCA 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. B. cargo risk. C. credit risk. D. business risk The forward market is especially well-suited to offer hedging protection against A. translation risk exposure. B. transactions risk exposure The euro is the name for A. a currency deposited outside its country of origin. C. political risk exposure. D. taxation B. a bond sold internationally outside of the country in whose currency C. the bond is denominated D. a common European currency Which of the following are international financial considerations faced by both small and large MNEs? A. Currency systems B. Tax systems C. Interest rates D. Exchange rate 117. Strategies in which funds are moved from one MNE operation to another are called A. funds positioning techniques B. arm's length techniques. C. fronting techniques. D. subsidiary flows 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. B. fund-available markets The bond markets are important because C. derivative exchange markets. D. financial markets. A. they are easily the most widely followed financial markets in the United States. Foreign Exchange Management 14

15 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. B. The US, the EU, and Japan 121. The EU is the major provider of FDI for: A. Eastern Europe. B. South America. C. North America D. ASEAN countries C. developing Asian countries D. all of these regions 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. B. fund-available markets Increasing interest rates A. discourage corporate investments. B.. discourage individuals from saving. C. encourage corporate expansion. D. encourage corporate borrowing. C. derivative exchange markets. D. financial markets 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. B. downward C. no 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. B. balance of money market flows C. balance of capital market flows D. unilateral transfers. Foreign Exchange Management 15

16 Answer key: 1-C 14-A 27-D 40-B 53-B 66-C 79-B 92-C 105-B 118-B 2-B 15-D 28-A 41-B 54-A 67-C 80-C 93-C 106-B 119-B 3-D 16-C 29-C 42-C 55-A 68-B 81-D 94-D 107-D 120-D 4-C 17-B 30-A 43-C 56-B 69-B 82-A 95-D 108-A 121-C 5-A 18-D 31-D 44-A 57-C 70-A 83-B 96-A 109-D 122-A 6-C 19-C 32-B 45-B 58-A 71-B 84-C 97-D 110-A 123-D 7-A 20-A 33-C 46-B 59-B 72-A 85-A 98-C 111-D 124-A 8-C 21-C 34-B 47-C 60-C 73-A 86-B 99-D 112-C 125-D 9-C 22-B 35-B 48-B 61-D 74-C 87-D 100-D 113-C 126-A 10-B 23-D 36-D 49-A 62-A 75-A 88-D 101-C 114-C 127-B 11-A 24-C 37-C 50-C 63-B 76-B 89-D 102-C 115-B 12-D 25-D 38-A 51-C 64-C 77-C 90-A 103-C 116-C 13-B 26-C 39-C 52-D 65-B 78-A 91-D 104-C 117-A Reserved Foreign Exchange Management 16