1.
The acronym SWIFT stands for
Correct Answer
B. Society for Worldwide Interbank Financial Telecommunication
Explanation
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. This organization provides a secure network for financial institutions worldwide to communicate and exchange information about financial transactions. The acronym accurately reflects the organization's purpose and global reach in facilitating interbank communication.
2.
India is facing continuous deficit in its balance of payments. In the foreign exchange market rupee is expected to
Correct Answer
C. Depreciate
Explanation
India's continuous deficit in its balance of payments indicates that it is importing more goods and services than it is exporting. This creates a higher demand for foreign currency, causing the value of the Indian rupee to depreciate in the foreign exchange market. As a result, the correct answer is that the rupee is expected to depreciate.
3.
The demand for domestic currency in the foreign exchange market is indicated by the following transactions in balance of payment.
Correct Answer
C. Export of goods and services and capital inflows
Explanation
The demand for domestic currency in the foreign exchange market is indicated by the export of goods and services and capital inflows. When a country exports goods and services, it receives payment in foreign currency. To convert this foreign currency into domestic currency, there is a demand for the domestic currency. Additionally, when there are capital inflows, such as foreign investment or loans, there is also a need to convert the foreign currency into domestic currency, leading to an increased demand for the domestic currency in the foreign exchange market.
4.
If PPP holds
Correct Answer
D. The real exchange rate will not change
Explanation
If PPP holds, it means that the purchasing power of two different currencies is equal. In this case, the real exchange rate will not change because the relative prices of goods and services in both countries will remain the same. The nominal exchange rate may change due to factors such as inflation or changes in interest rates, but the real exchange rate, which takes into account inflation and reflects the purchasing power, will remain constant. Therefore, the correct answer is that the real exchange rate will not change.
5.
The strike price under an option is
Correct Answer
C. The exchange rate which the currencies are agreed to be exchanged under the contract
6.
An option at-the-money when
Correct Answer
B. The strike price and the spot price are the same
Explanation
An option is considered at-the-money when the strike price, which is the predetermined price at which the option can be exercised, is equal to the spot price, which is the current market price of the underlying asset. In this scenario, the option is neither in-the-money (where the strike price is lower than the spot price) nor out-of-the-money (where the strike price is higher than the spot price). Therefore, the correct answer is that an option is at-the-money when the strike price and the spot price are the same.
7.
The true cost of hedging transaction exposure by using forward market is
Correct Answer
A. Difference between agreed rate and spot rate on the due date of contract
Explanation
The correct answer is "Difference between agreed rate and spot rate on the due date of contract." This is because when a company enters into a forward contract to hedge its transaction exposure, it agrees to buy or sell a specific amount of foreign currency at a predetermined rate on a future date. The spot rate refers to the current exchange rate at the time of the due date of the contract. The difference between the agreed rate and the spot rate on the due date represents the true cost of hedging the transaction exposure using the forward market.
8.
A firm operating in India cannot hedge its foreign currency exposure through.
Correct Answer
B. Futures
Explanation
A firm operating in India cannot hedge its foreign currency exposure through futures because futures contracts are not available for all currencies in the Indian market. The availability of futures contracts is limited to a few major currencies such as the US dollar, euro, British pound, and Japanese yen. Therefore, if the firm's foreign currency exposure is in a currency other than those available in the futures market, it cannot use futures contracts to hedge its exposure.
9.
Foreign currency exposures can be avoided by
Correct Answer
A. Denominating the transaction in domestic currency
Explanation
Denominating the transaction in domestic currency means conducting the transaction using the local currency instead of foreign currency. This helps to avoid foreign currency exposures because the transaction is not affected by fluctuations in exchange rates. By using the domestic currency, the parties involved are not exposed to the risk of currency value changes, making it a safer option.
10.
Maintaining a foreign currency account is helpful to
Correct Answer
C. Avoid both transaction cost and exchange risk
Explanation
Maintaining a foreign currency account is helpful in avoiding both transaction costs and exchange risk. By holding funds in a foreign currency, individuals or businesses can make international transactions without incurring additional fees for currency conversion. Additionally, by keeping funds in a foreign currency, they can mitigate the risk of exchange rate fluctuations, which could potentially lead to losses if the domestic currency depreciates. Therefore, maintaining a foreign currency account allows for cost-effective and risk-averse international transactions.
11.
Translation exposure is positive when
Correct Answer
A. Exposed liabilities are lesser than exposed assets.
Explanation
Translation exposure refers to the risk faced by a company when its financial statements are translated from one currency to another. In this case, if exposed liabilities are lesser than exposed assets, it means that the company has more assets than liabilities in a foreign currency. This can be advantageous as it implies that the company will benefit from a favorable exchange rate when translating its financial statements, leading to a higher profit. Therefore, translation exposure is positive in this scenario.
12.
For the purpose of translations, current rate refers to
Correct Answer
A. The rate prevailing on the date of the balance sheet
Explanation
The correct answer is "The rate prevailing on the date of the balance sheet." This means that for the purpose of translations, the exchange rate used is the one that is in effect on the date that the balance sheet is prepared. This ensures that the financial statements accurately reflect the value of foreign currency transactions and assets at the specific point in time when the balance sheet is being finalized.
13.
Exposed assets are those translated at
Correct Answer
A. Current rate
Explanation
Exposed assets refer to assets that are subject to foreign exchange risk. In this context, the term "translated" implies the conversion of the assets' values from one currency to another. The current rate refers to the exchange rate at the current moment, while the historical rate refers to the exchange rate at a specific point in the past. The average rate, on the other hand, is the average of exchange rates over a certain period. Therefore, the correct answer is "Current rate," as exposed assets are typically translated at the current exchange rate.
14.
Translation loss may occur when
Correct Answer
A. Exposed assets exceed exposed liabilities and foreign currency depreciates
Explanation
When exposed assets exceed exposed liabilities, it means that a company has more assets in a foreign currency than it has liabilities. If the foreign currency depreciates, the value of the assets will decrease while the liabilities remain the same. This results in a translation loss because the company will have to report a lower value for its assets when converting them back to the domestic currency.
15.
The following method cannot be used for managing translation exposure:
Correct Answer
A. Option contract
Explanation
Option contracts are financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific time period. While option contracts can be used for managing various types of financial risks, they are not typically used for managing translation exposure. Translation exposure refers to the risk of changes in the value of foreign currency-denominated assets and liabilities due to fluctuations in exchange rates. Option contracts do not directly address this type of exposure, as they are more commonly used for hedging against market risks or speculating on price movements.
16.
Economic exposure does not deal with
Correct Answer
A. Expected exchange rate changes
Explanation
Economic exposure refers to the risk that a firm's future cash flows may be affected by changes in exchange rates. It involves analyzing the impact of currency fluctuations on a company's international operations and assessing potential gains or losses. However, economic exposure does not specifically deal with predicting or expecting exchange rate changes. Instead, it focuses on understanding and managing the potential effects of those changes on a firm's cash flow and overall financial performance.
17.
The __________ refers to the orderly relationship between spot and forward currency exchange rates and the rates of interest between countries.
Correct Answer
A. Interest-rate parity
Explanation
Interest-rate parity refers to the relationship between spot and forward currency exchange rates and the rates of interest between countries. This concept suggests that the difference in interest rates between two countries should be equal to the difference in the forward exchange rates of their currencies. In other words, interest-rate parity implies that investors should not be able to make risk-free profits by borrowing in one currency, converting it into another currency, and investing it at a higher interest rate. This principle helps to ensure that exchange rates and interest rates are in equilibrium and prevents arbitrage opportunities in the foreign exchange market.
18.
Non-resident Bank Accounts refer to
Correct Answer
A. Vostro account
Explanation
Non-resident Bank Accounts, also known as vostro accounts, refer to accounts opened by a bank in a foreign country on behalf of another bank. These accounts are used to facilitate international transactions and allow the foreign bank to hold funds in the local currency. The term "vostro" means "yours" in Italian, indicating that the account is owned by the foreign bank. Therefore, this option accurately describes Non-resident Bank Accounts.
19.
The abbreviations SDR stands for
Correct Answer
A. Special Drawing Rights
Explanation
SDR stands for Special Drawing Rights. Special Drawing Rights are a type of international reserve asset created by the International Monetary Fund (IMF) to supplement member countries' official reserves. They were introduced in 1969 and are based on a basket of major international currencies, including the US dollar, euro, Chinese yuan, Japanese yen, and British pound. SDRs are used to facilitate international transactions and serve as a unit of account between member countries and the IMF. They are not a currency themselves, but rather a claim to currencies held by IMF member countries.
20.
The value of SDR is
Correct Answer
A. Based on basket of five currencies
Explanation
The value of SDR (Special Drawing Rights) is based on a basket of five currencies. This means that the SDR's value is determined by the combined value of these five currencies, which are typically the US dollar, Euro, Japanese yen, British pound, and Chinese yuan. The weights assigned to each currency in the basket are periodically reviewed and adjusted to reflect changes in the global economy. This approach allows the SDR to act as a stable international reserve asset and unit of account for the International Monetary Fund (IMF) member countries.