Question 1

Among the following items which does NOT represent the Application of Funds?

Accepted Answer

The application of funds refers to the use of financial resources by a business. Payment of interim dividend, supervisor's salary, and taxes are all uses of funds. However, the issue of share capital represents a source of funds, not an application.

Question 2

Until February 1973, which one of the following was prevalent in World Monetary System?

Accepted Answer

Until February 1973, the world monetary system operated under the Bretton Woods system, which is best described as an Adjustable Peg Exchange Rate System. Countries agreed to maintain fixed exchange rates between their currencies and the dollar, with the dollar convertible into gold.

Question 3

Which one of the following is NOT referred to as 'Major' or 'Hard' Currency?

Accepted Answer

The Indian Rupee is not considered a 'Major' or 'Hard' Currency. Major or hard currencies are those that are widely accepted around the world as a form of payment and are strong in the foreign exchange market. The US Dollar, Euro, and historically the French Franc (before it was replaced by the Euro) are examples of such currencies. The Indian Rupee, on the other hand, does not have the same level of international acceptance and strength.

Question 4

Rs. 75.17/USD is which type of quotation?

Accepted Answer

A direct quote in the foreign exchange markets is the amount of foreign currency needed to buy or sell one unit of the domestic currency. In this case, Rs. 75.17/USD means it takes 75.17 Indian Rupees to buy 1 US Dollar, which is a direct quote from the perspective of someone in India.

Question 5

In a two way foreign exchange quotation, the difference between ask and bid prices is called ____________.

Accepted Answer

The difference between the ask and bid prices in a two-way foreign exchange quotation is called the spread. This represents the cost of trading and the profit margin for the forex dealer.

Question 6

Below data is available: Spot Exchange Rate 6 Month's Forward Rate Rs./USD 75.17 Rs. 75.00 So, the forward rate is at ___________________

Accepted Answer

The forward rate is at a discount because the forward rate (Rs. 75.00) is less than the spot exchange rate (Rs. 75.17).

Question 7

From the data given below which option is true? Spot 1 month's Forward Rs./GBP 94.85 94.95

Accepted Answer

The answer of From the data given below which option...

Question 8

The rate of exchange of two currencies on the basis of exchange quotes of other pairs of currencies are derived when a quote of home currency (or desired currency) to any other currency is not available in the Foreign Exchange market is called ____________.

Accepted Answer

Cross Rate is the correct term for the rate of exchange derived from the exchange quotes of other pairs of currencies when a direct quote between two currencies is not available.

Question 9

Which of the below mentioned contract is a standardized contract?

Accepted Answer

Futures contracts are standardized in terms of their contract size, expiration, and settlement, making them highly regulated and traded on exchanges. Forward contracts, in contrast, are private agreements between two parties and can be customized to their specific needs, hence not standardized.

Question 10

An Option which can be exercised only on the maturity date is known as __________.

Accepted Answer

European Option is the correct answer because it is a type of option that can only be exercised at the end of its life, at its maturity.

Question 11

There is a close link between the interest rates in two countries and the forward rate premium or discount. The theory about this is :

Accepted Answer

Covered Interest Arbitrage and Interest Rate Parity theory explain the relationship between the interest rates of two countries and the forward rate premium or discount. This theory states that the difference in interest rates between two countries is equal to the difference between the forward exchange rate and the spot exchange rate, adjusted for the time period. This prevents arbitrage opportunities due to interest rate differentials.

Question 12

According to Fisher effect, the nominal rate is equal to the real interest rate plus an adjustment for ______________

Accepted Answer

The Fisher effect states that the nominal interest rate is equal to the real interest rate plus the inflation rate. This relationship shows how inflation affects the nominal interest rate to maintain the real rate of return.

Question 13

The acquisition of existing firms or plants as a means of FDI is called ___________.

Accepted Answer

Brown Field Investments refer to the acquisition of or investment in existing companies or facilities abroad, rather than establishing new operations.

Question 14

McDonald's purchasing farms in India to grow potatoes is which type of FDI?

Accepted Answer

McDonald's purchasing farms in India to grow potatoes is an example of vertical FDI because it involves investment in a foreign country in a different but related production stage within the same company’s supply chain.

Question 15

When an American Company acquires a division or unit of Indian company, the US is said to be a ______________ Country.

Accepted Answer

When an American company acquires a division or unit of an Indian company, the US is considered the "Sending" country because the investment is flowing out of the US and into India.

Question 16

An act of buying currency in one market at a lower price and selling it in another at higher price resulting in equilibrium in exchange rates of different currencies is called _________________.

Accepted Answer

Arbitrage involves buying and selling the same asset in different markets to profit from the price difference, leading to equilibrium in the prices across markets. In the context of currencies, this means buying a currency where it's cheaper and selling it where it's more expensive, thus contributing to equalizing the exchange rates.

Question 17

Which of these are considered as nerve centres of foreign exchange activity.

Accepted Answer

London, New York, and Tokyo are recognized as the primary centers for foreign exchange due to their significant volume of currency trading and their roles in global finance.

Question 18

Who are key participants of Foreign Exchange Market?

Accepted Answer

All of the above are key participants in the Foreign Exchange Market. Importers and exporters need to exchange currencies to conduct international trade, traders and foreign exchange brokers facilitate currency transactions, and speculators aim to profit from currency value fluctuations.

Question 19

When the exposed position in a foreign currency is covered through borrowing or lending in the money market, it is called ______________.

Accepted Answer

A money market hedge involves covering an exposed position in a foreign currency by borrowing or lending in the money market, where the transaction is settled in the currency in question, effectively hedging against currency risk.

Question 20

An efficient Capital Market provides operational efficiency through…

Accepted Answer

An efficient capital market ensures operational efficiency by simplifying transaction procedures, lowering settlement timings, and reducing transaction costs, all of which contribute to smoother and more cost-effective trading.

Quiz 3: Foreign Exchange and Capital Markets