Question 1

Maintaining a foreign currency account is helpful to

Accepted Answer

Maintaining a foreign currency account can help avoid both transaction costs and exchange risk. Transaction costs are saved by not having to convert currencies frequently, and exchange risk is mitigated by holding currency that may be needed for future transactions, thus avoiding potential losses from unfavorable currency movements.

Question 2

India's foreign exchange rate system is?

Accepted Answer

India operates a managed float exchange rate system, where the value of the rupee is allowed to fluctuate in the foreign exchange market, but the Reserve Bank of India intervenes occasionally to stabilize the currency's value or to steer it in a desired direction.

Question 3

Hedging transaction is indicated by

Accepted Answer

Hedging transactions do not necessarily involve odd amounts, require specific documentary support, or are determined by the frequency of transactions. These factors alone do not indicate hedging.

Question 4

Indirect rate in foreign exchange means

Accepted Answer

Indirect rate in foreign exchange means the rate quoted with the units of home currency kept fixed.

Question 5

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

Accepted Answer

The maxim 'buy low; sell high' is applicable for direct rates, where the domestic currency is the base and the foreign currency is the quote. This principle can be applied universally in trading and investment, including forex trading with direct rates.

Question 6

India is facing continuous deficit in its balance of payments. In the foreign exchange market rupee is expected to

Accepted Answer

A continuous deficit in the balance of payments typically leads to a depreciation of the domestic currency because it indicates that a country is importing more than it is exporting, leading to a higher demand for foreign currencies and a lower demand for the domestic currency.

Question 7

The effect of speculation on exchange rate is

Accepted Answer

Speculation can cause violent fluctuations in exchange rates as traders buy and sell currencies based on their expectations of future movements, and it can also aggravate market trends by amplifying movements in one direction or another.

Question 8

The demand for domestic currency in the foreign exchange market is indicated by the following transactions in balance of payment

Accepted Answer

The demand for domestic currency in the foreign exchange market is indicated by transactions that bring foreign currency into the country, such as the export of goods and services (foreigners buy domestic goods and services, thus needing the domestic currency) and capital inflows (foreign investments in the domestic country, which also require converting foreign currency into the domestic currency).

Question 9

If PPP holds

Accepted Answer

Purchasing Power Parity (PPP) theory primarily concerns the real exchange rate, ensuring that it remains constant over time if PPP holds. This means that the purchasing power of currencies should adjust to inflation rates, keeping the real exchange rate stable, regardless of movements in nominal exchange rates.

Question 10

The forward US dollar is quoted at premium against Indian Rupees. This implies

Accepted Answer

When the forward US dollar is quoted at a premium against the Indian Rupee, it indicates that the interest rates in India are higher than in the US, leading to a higher forward rate for the dollar.

Question 11

Determination of forward rates is explained by

Accepted Answer

The answer of Determination of forward rates is explained by
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Question 12

According to International Fisher Effect

Accepted Answer

The International Fisher Effect suggests that a currency with a higher interest rate will depreciate in the future, leading to a forward premium indicating appreciation.

Question 13

Cash and carry arbitrage explains the determination of

Accepted Answer

Cash and carry arbitrage primarily explains the determination of forward rates for currencies by exploiting the arbitrage opportunity between the spot and forward markets to ensure no risk-free profit exists.

Question 14

The marking to market in respect of a currency future refers to

Accepted Answer

Marking to market in the context of currency futures involves adjusting the margin accounts of both the buyer and seller to reflect the daily changes in the value of the futures contract. This ensures that the contract reflects the current market value of the underlying asset.

Question 15

For the balance kept in the margin account for futures

Accepted Answer

The answer of For the balance kept in the margin...

Question 16

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

Accepted Answer

Currency options give the buyer the right, but not the obligation, to buy or sell currency at a specified price before a certain date, distinguishing them from other derivatives where obligations are typically mutual.

Question 17

The following statement with respect to currency option is wrong

Accepted Answer

Exporters typically use put options to hedge against the risk of foreign currency depreciation, not call options.

Question 18

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

Accepted Answer

Options provide the right, but not the obligation, to buy or sell a currency at a predetermined rate, offering flexibility to manage foreign exchange contingency exposure effectively. Unlike forwards, futures, or swaps, options allow the holder to choose whether to exercise the contract based on market conditions, thus providing a hedge without the commitment to transact unless it is beneficial.

Question 19

The strike price under an option is

Accepted Answer

The strike price under an option is the exchange rate at which the currencies are agreed to be exchanged under the contract. This is a key term in options contracts, defining the price at which the option holder can buy or sell the underlying asset.

Question 20

An option at-the-money when

Accepted Answer

An option is considered at-the-money when the strike price and the spot price are the same, meaning the option has neither intrinsic value nor out-of-the-money status.

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