Deck 1: Foreign Currency Accounts, Exchange Rates, and Derivatives: Exploring the World of Foreign Exchange

Question 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

Answer 1

Avoid both transaction cost and exchange risk.

Question 2

India's foreign exchange rate system is?

A)Free float
B)Managed float
C)Fixed .
D)Fixed target of band

Answer 2

Managed float

Question 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.

Answer 3

None of the above.

Question 4

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.
C)The rate quoted in terms of a third currency.
D)None of the above.

Question 5

The maxim 'buy low; sell high' is applicable for

A)Quotation of Pound-Sterling.
B)Indirect rates.
C)Direct rates.
D)USDOLLARS.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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

Question 10

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.

Question 11

Determination of forward rates is explained by

A)Uncovered interest arbitrage.
B)Purchasing power parity theory.
C)Demand and Supply for spot currency.
D)None of the above.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

A feature of currency option that distinguishes it from other derivatives is

A)It carries premium to be paid up front.
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.

Question 17

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.

Question 18

For contingency exposure of foreign exchange, the best derivative that can be used to hedge is

A)Forwards.
B)Futures.
C)Options.
D)Swaps.

Question 19

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

Question 20

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.

Question 21

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 receiv

Question 22

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.