Notes

Module 5:

Check your understanding 

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

(c) The rate quoted in terms of a third currency

(d) None of the above

6. The exchange rate is ________.

(a) The price of one currency relative to gold

(b) The value of a currency relative to inflation

(c) The change in the value of money over time

(d) The price of one currency relative to another

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

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.

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

10. For option forward purchase transactions the forward premium will be reckoned

(a) based on earliest delivery date

(b) based on latest delivery date

(c) based on the average due date for delivery

(d) none of the above

 11. Cover deal by a dealer of an authorised dealer is undertaken to ________.

(a) profit from exchange rate movements

(b) cover up mistakes done by the dealer

(c) square up the position resulting from dealings with customers

(d) none of the above.

12. For the banker, the spread will be wider when ________.

(a) purchase of foreign currency from a customer is covered by a sale to another

customer of the bank

(b) merchant trades are covered by interbank deals

(c) exposure in one currency is covered by a position in another currency

(d) purchase of foreign currency from a customer is covered by sale to customer of

another bank

13. A swap deal is executed by ________.

(a) settling the difference in the rates

(b) actual delivery of currencies

(c) entering into another swap deal

(d) none of the above

14. The rate applied when a foreign bills is purchased ________.

(a) TT buying rate

(b) TT selling rate

(c) Bill selling rate

(d) Bill buying rate

15. With regard to charging of commission, quotation of rates, etc., the authorised

dealer should also comply with the rules of ________.

(a) RBI

(b) FEDAI

(c) Central Government

(d) Bank

16. FEDAI has its headquarters at ________.

(a) Delhi

(b) Mumbai

(c) Kolkata

(d) Bangaluru

17. What happens when the central bank withdraws reserves from the market?

(a) None of the following.

(b) The interbank interest rate rises.

(c) The interbank interest rate doesn't change.

(d) The interbank interest rate drops.

18. Which is not an open market operation?

(a) Central banks conduct auctions of reserves as repurchase agreements.

(b) Purchasing or selling government securities.

(c) Purchasing and selling foreign exchange.

(d) Making loans.

19. Which assets are generally purchased by central banks?

(a) Gold bullion or other precious metals.

(b) Foreign exchange reserves.

(c) Loans to governments.

(d) Real estate.

20. What does a bank do if there are no excess reserves?

(a) Stop client's transactions.

(b) Take back the loans from clients.

(c) Borrow reserves either from another bank, or directly from the central bank.

(d) Set a higher interest rate.

1. (c).      2. (b)

3. (d).      4. (c)

5. (a).      6. (d)

7. (a)       8. (c)

9. (b)      10. (a)

11. (c).    12. (a)

13. (b).    14. (d)

15. (d)     16. (b)

17. (b).    18. (d)

19. (b).     20. (c)