Nehru Arts and Science College

Department of Business Administration

QuestionBank on Foreign Exchange Management

Faculty: Dr.V.Sivakamy Class: III BBA IB

UNIT I

1. If a country is currently lending more to the rest of the world than it is borrowing from

the rest of the world, the country is a

a) Creditor nation b) Debtor nation c) Net lender d) Net borrower.

2. A creditor nation means a nation whose

a) Total investments in the rest of the world exceeds the rest of the world's investments in

thatcountry.

b) Exports exceed its imports.

c) Current account is larger than its capital account.

d) Lending to the rest of the world exceeds its borrowing from the rest of the world.

3. A debtor nation means a nation whose

a) Total investments in the rest of the world are less than the rest of the world's

investments inthat country.

b) Lending to the rest of the world exceeds its borrowing from the rest of the world.

c) Current account is less than its capital account.

d) Imports exceeds its exports

4. By definition, currency depreciation occurs when the value of

a) One currency falls relative to another currency.

b) One currency rises relative to another currency.

c) All currencies fall relative to gold.

d) Gold falls relative to the value of currencies.

5. As foreign exchange activity has grown:

a) Central bank intervention has become more effective.

b) Central bank intervention has become more frequent.

c) Central bank intervention has become less effective.

d) None of the above

6. Which of the following are examples of currency controls?

a) Import restrictions. b) Prohibition of remittance of funds.

c) Ceilings on granting credit to foreign firms. d) All of the above

7. Which of the following operations benefits from depreciation of the firm's local

currency?

a. borrowing in a foreign country and converting the funds to the local currency

prior to the depreciation.

b. purchasing foreign supplies.

c. investing in foreign bank accounts denominated in foreign currencies prior to

depreciation of the local currency.

d. A and B

8. Subsidiary A of Mega plc has net inflows in Australian dollars of a$1,000,000, while

Subsidiary B has net outflows in Australian dollars of a$1,500,000. The expected

exchange rate of the Australian dollar is £0.30. What the net inflow or outflow is as

measured in pounds?

a. £150,000 outflow. c. £1,666,000 inflow.

b. £150,000 inflow. d. £1,666,000 outflow.

9. A firm produces goods for which substitute goods are produced in all countries.

Appreciation of the firm's local currency should:

a. increase local sales as it reduces foreign competition in local markets.

b. increase the firm's exports denominated in the local currency.

c. increase the returns earned on the firm's foreign bank deposits.

d. increase the firm's cash outflow required to pay for imported supplies

denominated in a foreign currency.

e. none of the above

10. Under a fixed exchange rate system:

a) Central bank intervention in the foreign exchange market is not permitted.

b) A forward foreign exchange market does not exist as it would be pointless since rates

do not move;

c) Central bank intervention in the foreign exchange market is not necessary since rates

do not move;

d) Central bank intervention in the foreign exchange market is often necessary;

11. A Eurodollar is:

a)A dollar bank deposit in a bank outside of the United States

b A currency issued by the World Bank and pegged to the US dollar

cAnother name for a Special Drawing Right (SDR)

dNone of the above is correct

12. Exports and Imports come under the purview of:

a) Ministry of Finance b) Ministry of Commerce

c) Ministry of External Affairs d) Ministry of SSI

13. State Bank of India is maintaining account in Japanese Yen with American Express

Bank, Tokyo. It is known as:

a. Vostro account b. Nostro account

c. Loro account d. Escrow account

14. Which one of the following is not an approved manner of payment for exports as per

FEMA 1999 on Exports?

a. Bank Draft, pay order, bankers, cheque or personal cheques

b. FC Notes/F. T/Cs from the buyer during his visit to India

c. Payment out of funds held in the FCNR/NRE account maintained by the buyer

d. Precious metals i.e. Gold/Silver/Platinum by Gems &Jewelry Units in SEZs and

100%

e. Indian Rupees in cash

15. An appreciation of the Rupee relative to the US Dollar would be expected to have which

of the following effects?

a) Increase US exports to India

b) Increase US imports from India

c) Raise the cost to Americans for Indian imports

d) Create Balance of Payments surplus for India

e) Create Balance of payments surplus for USA

16. Which one of the following modes of entry brings the firm closer to international markets?

a) Licensing b) Franchising

c) Contract manufacturing d) Joint venture

17. Which one of the following is not amongst India’s major export items?

a) Textiles and garments b) Gems and jewelry

c) Oil and petroleum products d) Basmati rice

18. Which one of the following is not amongst India’s major import items?

a) Ayurvedic medicines

b) Oil and petroleum products

c) Pearls and precious stones

d) Machinery

19. Which one of the following is not amongst India’s major trading partners?

a) USA

b) UK

c) Germany

d) New Zealand

20. Multilateral netting:

a) Raises the rate exchange paid to move funds from one currency or country to another

b) Reduces the cost of moving funds from one currency or country to another

c) Lowers the exchange rate paid to move funds from one currency or country to another

d) Reduces the amount of translation exposures

e) Increases the cost of moving funds from one currency or country to another

21. If one anticipates that the pound sterling is going to appreciate against the US dollar, one

might speculate by _______ pound call options or ______ pound put options.

a) buying; selling

b) selling; buying

c) buying; buying

d) selling; selling

22. Netting achieves all but one of the following:

a) Transactions costs are lowered;

b) Transaction exposure is reduced.

c) Currency conversion costs are reduced;

d) Foreign exchange movements between subsidiaries are reduced;

23. Two important practical differences between the monetary/non-monetary method and the

current rate method of translation is found in their treatment of:

a) Monetary assets

b) Issued share capital and retained earnings

c) Cash and accounts receivable

d) Inventories and fixed assets

e) Fixed assets and owner's equity

24. The date of settlement for a foreign exchange transaction is referred to as:

a) Clearing date

b) Swap date

c) Value date

d) Maturity date

e) Transaction date

25. Which of the following is true of foreign exchange markets?

a) The futures market and the forward market are mainly used for hedging.

b) The futures market and the forward market are mainly used for speculating.

c) The futures market is mainly used by speculators while the forward market is mainly

used for hedging.

d) The futures market is mainly used by hedgers while the forward market is mainly

used for speculating.

5 Marks Questions

1. What is forex market? Discuss its role in facilitating international trade.

2. The international economy is fast Turing into a borderless global village. Critically

examine.

3. Explain the difference between:

i. A fixed exchange rate

ii. A floating exchange rate

4. Discuss the ways in which governments can influence their currency through the use of

monetary policy when the country faces a:

a) Floating exchange rate

b) Fixed exchange rate

5. Explain the globalization of financial markets.

8 Marks Questions

1. What do you mean by Foreign Exchange Market? Discuss the role played by the main

participants in this market.

2. What is the geographical location of foreign exchange market? Discuss in brief factions

of major players in the foreign exchange market.

3. Explain the salient features of the regulations over foreign exchange in India.

UNIT II

1. The foreign exchange rate is the price at which the ________ of one country exchanges

for the ________ of another country.

a) Currency; goods b) currency; financial instruments

c) Currency; currency d) goods; goods

2. In the foreign exchange market, the ________ of one country is traded for the ________

of another country.

a) Currency; currency b) currency; financial instruments

c) Currency; goods d) goods; goods

3. Which of the following apply to exchange rates?

I) The exchange rate is a price.

II) The exchange rate for a currency depends on which foreign exchange market you use.

III) The foreign exchange rate is different from other prices because it is not determined

by supply and demand.

a) I b) II and III c) I, II, and III d) I and II

4. A rise in the U.S. exchange rate will

a) Decrease the demand for dollars. b) Increase the demand for dollars.

c) Decrease the quantity of dollars demanded. d) Increase the quantity of dollars

demanded.

5. A fall in the U.S. exchange rate will

a) Increase the quantity of dollars demanded. b) Increase the demand for dollars.

c) Decrease the quantity of dollars demanded. d) Decrease the demand for dollars.

6. The ________ the current exchange rate, the ________ is the expected profit from

holding dollars, all other things remaining the same.

a) Lower; larger b) lower; smaller

c) Higher; larger d) The premise of the question is wrong

7. The value of the Australian dollar (A$) today is £0.41. Yesterday, the value of the

Australian dollar was £0.38. The Australian dollar ____________by _______%.

a) Depreciated; 7.90 c) appreciated; 7.90

b) Depreciated; 7.30 d) appreciated; 7.30

8. The Exchange Rate Mechanism (ERM) crisis in 1992 represents the __________ in

German interest rates that caused other European interest rates to __________, and

resulted in less aggregate spending.

a) Increase; increase c) decrease; decrease

b) Increase; decrease d) decrease; increase

9. Which of the following forecasting techniques would best represent the use of today's

forward exchange rate to forecast the future exchange rate?

a. fundamental forecasting. c. technical forecasting.

b. market-based forecasting. d. mixed forecasting.

10. Assume that the forward rate is used to forecast the spot rate. The forward rate of the

Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is £0.47.

The spot rate forecasted for one year ahead is:

a. £0.4418. b. £0.2032. c. £0.5467. d. £0.4982.

11. If a foreign country's interest rate is similar to the UK rate, the forward rate premium or

discount will be _________, meaning that the forward rate and spot rate will provide

________ forecasts.

a. substantial; similar c. close to zero; similar

b. substantial; very different d. close to zero; very different

12. An increase in UK interest rates relative to euro interest rates is likely to ________ the

UK demand for euros and _________ the supply of euros for sale.

a. reduce; increase c. reduce; reduce

b. increase; reduce d. increase; increase

13. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational

firm's reported earnings (from the consolidated income statement) to _______. If a firm

desired to protect against this possibility, it could stabilize its reported earnings by

_______ euros forward in the foreign exchange market.

a. be reduced; purchasing c. increase; selling

b. be reduced; selling d. increase; purchasing

14. If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements,

and is due to receive USD100, 000 in 90 days, it could:

a) enter into a 90-day forward purchase of US dollars for euros;

b) enter into a 90-day forward sale of US dollars for euros;

c) purchase US dollars 90 days from now at the spot rate;

d) sell US dollars 90 days from now at the spot rate.

15. If direct spot quotations in New York and London were $1.5995–1.6000 and £0.6250–0.6254

respectively, arbitrage profits per $1m would be:

a) 0 b) $640 c) $327 d) $313

16. Cross currency swaps typically have larger swings in total value than plain vanilla

interest rate swaps because:

a) Cross currency swaps exchange principal as well as interest payments

b) Interest rate movements are more volatile than currency movements

c) Interest rate swap agreements do not allow, contractually, large movements from par

d) All are valid explanations

17. Forward exchange rates are useful for those who wish to

a) Protect themselves from the risk that the exchange rate will change before

atransaction is completed.

b) Gamble that a currency will rise in value.

c) Gamble that a currency will fall in value.

d) Exchange currencies at a point in time in the future.

e) All of the above

18. What is the impact of a fall in a country’s exchange rate?

1 Exports will be given a stimulus

2 The rate of domestic inflation will rise

a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2

19. Cross currency swaps typically have larger swings in total value than plain vanilla

interest rate swaps because:

a. Cross currency swaps exchange principal as well as interest payments

b. Interest rate movements are more volatile than currency movements

c. Interest rate swap agreements do not allow, contractually, large movements from

par

d. A and C are both correct

e. All are valid explanations

20. Which of the following is not a major trading center of foreign exchange?

a) Singapore c) London

b) Tokyo d) Hong Kong

21. EXIM Bank was established in the year

a) 1982 b) 1983 c) 1991 d) 1981

22. The statement “the yen rose today from 121 to 117” makes sense because

a. The U.S. gains when Japan loses.

b. These numbers measure yen per dollar, not dollars per yen.

c. These numbers are indexes, defined relative to a base of 100.

d. These numbers refer to time of day that the change took place.

e. The yen is a reserve currency

23. Under a fixed exchange rate system:

a) central bank intervention in the foreign exchange market is not permitted.

b) forward foreign exchange market does not exist as it would be pointless since

rates do not move;

c) central bank intervention in the foreign exchange market is not necessary since

rates do not move;

d) central bank intervention in the foreign exchange market is often necessary;

24. If purchasing power parity were to hold even in the short run, then:

a) quoted nominal exchange rates should be stable over time.

b) real exchange rates should tend to increase over time;

c) real exchange rates should tend to decrease over time;

d) real exchange rates should be stable over time;

25. If the identical product or service can be sold in two different markets, no restrictions

exist on the sale, and transportation costs of moving the product between markets are

zero, the product's price should be the same in both markets. This theory is called:

a) Efficient Market Theory

b) The Law of One Price

c) Purchasing Power Parity

d) Market Parity Theory

e) The Fisher effect

5 Marks Questions

1. Using supply and demand analysis illustrate and explain fixed and floating exchange

rates.

2. What is the balance of payment account and how do changes in the exchange rate of a

country affect this account?

3. Define and explain the difference between the following pairs of terms:

a. Spot market / Forward market

b. Interest rate arbitrage / Covered interest arbitrage

c. Real exchange rate / Nominal exchange rate

4. All hedging is speculation but all speculation is no hedging Discuss.

5. Explain the relationship between forward and spot Exchange rate.

8 Marks Questions

1. Briefly explain different methods of exchange rate forecasting. Discuss their suitability in the Indian context.

2. Briefly explain the present Indian Exchange Rate system.

3. “Swap transactions are the sure route to cheaper long-term finance for the corporate

treasurer”. Explain your reasons for agreeing or disagreeing with this statement.

UNIT III

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate

estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

a. positive.

b. negative.

c. positive if the forward rate exhibits a premium, and negative if the forward rate

exhibits a discount.

d. zero.

2. An example of cross-hedging is:

a. find two currencies that are highly positively correlated; match the

payables of the one currency to the receivables of the other currency.

b. use the forward market to sell forward whatever currencies you will

receive.

c. use the forward market to buy forward whatever currencies you will

receive.

d. B and C

3. The real cost of hedging payables with a forward contract equals:

a. the nominal cost of hedging minus the nominal cost of not hedging.

b. the nominal cost of not hedging minus the nominal cost of hedging.

c. the nominal cost of hedging divided by the nominal cost of not hedging.

d. the nominal cost of not hedging divided by the nominal cost of hedging.

4. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro

will depreciate substantially over time. Assuming that the firm is correct, the ideal

strategy is to:

a. sell euros forward.

b. write euro currency put options.

c. purchase euro currency call options.

d. purchase euros forward.

e. remain unhedged.

5. A _______ involves an exchange of currencies between two parties, with a promise to re-

exchange currencies at a specified exchange rate and future date.

a. long-term forward contract c. parallel loan

b. currency swap d. money market hedge

6. Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is

£0.42. If Parker Company uses a money market hedge, what equivalent amount could it

receive in 360 days?

a. £101,904

b. £88,769

c. £84,919

d. £72,307

7. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the

real cost of hedging payables will be:

a. highly positive. c. zero.

b. highly negative. d. none of the above

8. The price at which one can enter into a contract today to buy or sell a currency 30

days from now is called a

a. Reciprocal exchange rate.

b. Effective exchange rate.

c. Exchange rate option.

d. Forward exchange rate.

9. Hedging is used by companies to:

a) Decrease the spread between spot and forward market quotes

b) Decrease the variability of tax paid

c) Increase the variability of expected cash flows

d) Decrease the variability of expected cash flows

e) Increase the variability of tax paid

10. One of the advantages of a fixed exchange rate system is that

a. fixed rates vary more than floating rates

b. fixed rates may be inconsistent with economic fundamentals

c. fixed rates are immune to political forces

d. fixed rates reduce volatility

11. The exchange rate risk of the Covered Interest Arbitrage are

a. higher than those of Uncovered Interest Arbitrage

b. lower than those of Uncovered Interest Arbitrage

c. equal to those of Uncovered Interest Arbitrage

d. similar

12. If forward rate are unbiased estimators of future spot rates, then they

a. always correctly predict spot rates

b. always correctly predict the direction to which the spot rate will move

c. are equally likely to over and under-predict the future spot rate

d. are unrelated to the interest rate markets

13. When a government follows a fixed exchange rate regime it allows the exchange rate to

be determined by market forces

A) TRUE

B) FALSE

14. In a fixed exchange rate regime, the central bank will intervene by _____ pounds to

________ the exchange rate

a. selling, increase

b. buying, reduce

c. selling, reduce

d. buying, increase

15. Which of the following is true of foreign exchange markets?

a) The futures market and the forward market are mainly used for hedging.

b) The futures market and the forward market are mainly used for speculating.

c) The futures market is mainly used by speculators while the forward market is

mainly used for hedging.

d) The futures market is mainly used by hedgers while the forward market is mainly

used for speculating.

16. The difference between the bid and the ask rate is known as the —

a) bid-ask spread

b) quotation spread

c) bid-ask quotation

d) bid-ask exchange rate

17. Which of the following are frequent criticisms of globalization

a) It increases inequality in the global economy.

b) Multinational companies exploit workers.

c) it destroys the environment.

d) All of the above.

18. The price at which one can enter into a contract today to buy or sell a currency 30

days from now is called a

a. Reciprocal exchange rate. b. Effective exchange rate.

c. Exchange rate option. d. Forward exchange rate. e. Multilateral exchange rate

19. Which of the following is true?

a) As the majority of futures contracts are never taken to delivery a futures contract

is not legally binding

b) The quantity in a futures contract is agreed between the buyer and seller

c) Delivery dates on futures contracts are specified by the futures exchange and not

by the buyer and seller

d) The margin requirement is a purchase cost of a future.

20. Which of the following measures will allow a UK company to enjoy the benefits of a

favourable change in exchange rates for their euro receivables contract while protecting

them from unfavourable exchange rate movements?

a) A forward exchange contract

b) A put option for euros

c) A call option for euros

d) A money market hedge

21. A UK business expects to receive euros in five months’ time. Assume that the business

wishes to hedge against exchange rate risk.Which one of the following methods should

be employed?

a) Take out a forward contract to sell euros in five months’ time

b) Take out a forward contract to buy euros in five months’ time

c) Buy euros now at the prevailing spot rate

d) Take out a call option on euros.

22. Three derivatives that may be used to manage financial risk are Futures contracts,

Forward contracts and Swaps. Which of the above may be traded on an organised

exchange?

a) Futures contracts b) Forward contracts

c) Swaps d) All the above

23. If a business benefits from gap exposure what does this mean?

a) The timing of interest rate movements on deposits and loans means it has made a

profit

b) The timing of interest rate movements on deposits and loans means it has made a

loss

c) The interest rates reduce between deciding a loan is needed and signing for that

loan.

d) The inefficiencies between two markets means arbitrage gains are possible.

24. A yield curve shows

a) the relationship between liquidity and bond interest rates

b) the relationship between time to maturity and bond interest rates

c) the relationship between risk and bond interest rates

d) the relationship between bond interest rates and bond prices

25. In relation to hedging interest rate risk, which of the following statements is correct?

a) The flexible nature of interest rate futures means that they can always be matched

with a specific interest rate exposure

b) Interest rate options carry an obligation to the holder to complete the contract at

maturity

c) Forward rate agreements are the interest rate equivalent of forward exchange

contracts

d) Matching is where a balance is maintained between fixed rate and floating rate

debt

5 Marks Questions

1. Discuss the importance of the study of Foreign Exchange.

2. Explain briefly and illustrate with an example the chain method of marking out cross

rates.

3. Briefly explain the present Indian Exchange Rate system.

4. Explain the different methods of quoting foreign exchange rates.

5. Explain the terms (a) Bid rate (b) Offer rate (c) Bid-offer spread

8 Marks Questions

1. Briefly explain different methods of exchange rate forecasting. Discuss their suitability in

the Indian context.

2. (i) Distinguish between spot and forward market for foreign currencies

(ii) What are cross rates? Illustrate with examples.

3. Describe the fundamental factors affecting exchange rate fluctuations.

UNIT IV

1. Translation exposure reflects:

a. the exposure of a firm's ongoing international transactions to exchange rate

fluctuations.

b. the exposure of a firm's local currency value to transactions between foreign

exchange traders.

c. the exposure of a firm's financial statements to exchange rate fluctuations.

d. the exposure of a firm's cash flows to exchange rate fluctuations.

2. The __________ the percentage of an MNC's business conducted by its foreign

subsidiaries, the _________ the percentage of a given financial statement item that is

susceptible to translation exposure.

a. greater; smaller c. greater; greater

b. smaller; greater d. none of the above

3. Which of the following is the least effective way of hedging transaction exposure in the

long run?

a. long-term forward contract. c. parallel loan.

b. currency swap. d. money market hedge.

4. With regard to hedging translation exposure, translation losses _______; and gains on

forward contracts used to hedge translation exposure _______.

a. are not tax deductible; are taxed c. are not tax deductible; are not taxed

b. are tax deductible; are taxed d. are tax deductible; are not taxed

5. Assume a UK firm uses a forward contract to hedge all of its translation exposure. Also

assume that the firm underestimated what its foreign earnings would be. Assume that the

foreign currency depreciated over the year. The firm would generate a translation

_______, which would be _______ than the gain generated by the forward contract.

a. loss; smaller c. gain; larger

b. loss; larger d. gain; smaller

6. An effective way for an MNC to assess its economic exposure is to look at the firm's:

a. income statement. c. retained earnings.

b. liquidity. d. level of stockholder's equity.

7. As opposed to transaction exposure, managing economic exposure involves developing a

________ solution.

a. short-term c. immediate

b. long-term d. none of the above

8. A forward currency transaction:

a) Calls for exchange in the future of currencies at an agreed rate of exchange

b) Is always at a premium over the spot rate

c) Means that delivery and payment must be made within one business day

(USA/Canada) or two business days after the transaction date

d) Sets the future date when delivery of a currency must be made at an unknown spot

exchange rate

e) None of the above is correct

9. Two important practical differences between the monetary/non-monetary method and the

current rate method of translation is found in their treatment of:

a) Monetary assets

b) Issued share capital and retained earnings

c) Cash and accounts receivable

d) Inventories and fixed assets

10. Two basic procedures for translation are currently used in most of the world. They are:

a) Temporal method and Current rate method

b) Dollar-based method and Euro-based method

c) Accounting method and Translation method

d) Translation method and Temporal method

e) Monetary method and Non-monetary method

11. Translation exposure reflects the exposure of a firm’s:

a. ongoing international transactions to exchange rate fluctuations;

b. financial statements to exchange rate fluctuations;

c. Cash flows to exchange rate fluctuations.

d. local currency value to transactions between foreign exchange traders;

12. The date of settlement for a foreign exchange transaction is referred to as:

a) Clearing date

b) Swap date

c) Value date

d) Maturity date

e) Transaction date

13. Which of the following is not a type of foreign exchange exposure?

a) Transaction exposure

b) Translation exposure

c) Balance sheet exposure

d) Economic exposure

e) Tax exposure

14. Which of the methods below may be viewed as most effective in protecting against

economic exposure?

a) Futures market hedging

b) Money market hedges

c) Forward contract hedges

d) Geographical diversification

e) None of the above

15. When an enterprise has an unhedged receivable or payable denominated in a foreign

currency and settlement of the obligation has not yet taken place that firm is said to have:

a) Tax exposure

b) Accounting exposure

c) Transaction exposure

d) Infinite exposure

e) Operating exposure

16. The degree of political risk faced by a European company operating in an Asian country:

a) may be specified objectively by using a political risk index;

b) depends on how the firm has structured and financed its Asian operations;

c) Is given by the net present value of the Asian investment divided by the present value

of cash flows relating to the political risk factor.

d) depends on the benefits provided by the firm;

17. The main technique used by international firms to manage accounting exposure is a:

a) Balance sheet hedge

b) Square position

c) Money market hedge

d) Forward market hedge

e) Foreign currency options hedge

18. Exporters Co is concerned that the cash received from overseas sales will not be as

expected due to exchange rate movements.What type of risk is this?

a) Translation risk

b) Economic risk

c) Interest rate risk

d) Transaction risk

19. ‘There is a risk that the value of our foreign currency-denominated assets and liabilities

will change when we prepare our accounts.’To which risk does the above statement refer?

a) Translation risk

b) Economic risk

c) Transaction risk

d) Interest rate risk

20. What is the purpose of hedging?

a) To protect a profit already made from having undertaken a risky position

b) To make a profit by accepting risk

c) To reduce or eliminate exposure to risk

d) To reduce costs.

21. An effective way for an MNC to assess its economic exposure is to look at the firm's:

a. income statement. c. retained earnings.

b. liquidity. d. level of stockholder's equity.

22. Which of the following is NOT an additional challenge faced by a firm moving from the

international trade phase to the multinational phase of globalization?

a. country risk b. Operating exposure

c. shareholder wealth maximization d. Political risk

23. At international trade phase, a firm will have

a. transaction exposure b. Translation exposure

c. operating exposure d. All of the above

24. Under which of the following hedging techniques, that an MNC uses to eliminate its

transaction exposure, the associated cash flows cannot be determined with certainty?

(a) Forward hedge

(b) Futures hedge

(c) Money market hedge

(d) Currency option hedge

25. Where supply and demand are allowed to determine a country’s exchange rate, we say

the exchange rate is:

a) floating

b) fixed

c) pegged to the dollar

d) pegged to the gold standard

5 Marks Questions

1. Define exposure, differentiating between accounting and economic exposure.

2. Describe at least three circumstances under which economic exposure is likely to exist.

3. What risks confront dealers in the foreign exchange market?

4. Define foreign exchange risk exposure. What are the various kinds of foreign exchange

exposures?

5. What is the basic purpose of economic exposure management?

6. The nature and magnitude of foreign exchange exposure depends on the market segment

in which a form operates. Comment on this statement with suitable examples. What are

the important elements of a currency risk sharing agreement?

7. What are the major problems of economic exposure management? Discuss

8 Marks Questions

1. What are important techniques of exposure management which may be internally adopted

by a multinational firm?

2. Explain the need for foreign exchange exposure management. Discuss the various

external exposure management techniques used to manage the exchange risk.

3. Differentiate between Accounting Exposure and Economic Exposure. Discuss the

principal translation methods of Foreign Subsidiaries Accounts.

UNIT V

1. Which one of the following is not a source of fund available to banks Pre-shipment

Credit in Foreign Currency (PCFC) Scheme?

a. EEFC A/cs

b. NRE A/cs

c. RFC A/cs

d. FCNR(B) A/cs

e. Escrow A/cs

2. Unless otherwise specified in a Letter of Credit which is issued subject to UCPDC 500

and also UCPDC 600, documents must be presented for negotiation within ------ days

from the date of shipment :

a. 10 days

b. 7 days

c. 15 days

d. 21 days

3. With _______, the exporter ships the goods to the importer while still retaining actual

title to the merchandise.

a. a letter of credit arrangement c. a draft arrangement

b. an open account arrangement d. a consignment arrangement

4. A bill of exchange requesting the bank to pay the face amount upon presentation of

documents is a:

a. banker's acceptance. c. letter of credit.

b. time draft. d. sight draft.

5. The foreign exchange rate is the price at which the ________ of one country exchanges

for the________ of another country.

a. currency; goods b currency; financial instruments

c. currency; currency d goods; goods

6. The principal documents used in documentary collection are —

a) bank guarantees

b) cheques

c) revolving letters of credit

d) bills of lading

7. ------------------- is a time draft drawn on and accepted by one bank on another one.

a) bill of lading

b) banker’s acceptance

c) corporate guarantee

d) bank guarantee

8. The exchange of interest or foreign currency exposures is called —

a) put option

b) in the money

c) forward

d) swap

9. When the Exchange rate of a country is lowered to help trade we say the currency has

been:

a. politically adjusted

b. revalued

c. realigned

d. devalued

10. Where supply and demand are allowed to determine a country’s exchange rate, we say

we have exchange rate is:

a) floating b) fixed c) pegged to the dollar d) pegged to the gold

standard

11. The maximum period of pre shipment finance is normally

a) 90 days b) 180 days c) 60 days d) 160 days

12. ---------is a document issued by importer’s bankstating that payment will bemade to the

exporter if the required documents arepresented to the bank withinthe validity period

(a) pre-shipment bill (b) bank guarantee (c) letter of credit (d) export order

13. Which among the following is not important requirement for obtaining pre-shipment

finance?

(a) confirmed export order (b) undertaking regarding utilization of fund

(c)resident certificate (d) appropriate policy or guarantee from ECGC

14. Medium and long term post shipment finance is extended by

(a) EXIM bank (b) SBI (c) NABARD (d) RBI

15. Shipment (comprehensive risks) Policy covers

(a) Commercial Risks (b) Political Risks

(c) Both commercial and political risks (d) none ofthe above

16. Parties to Letter of Credit includes

(a) the buyer (b) issuing bank(c) the negotiating bank (d)allthe above

17. The Bill of Exchange which is sent to the Bankfor collection of the proceedsfrom the

drawee unaccompanied by shipping documentsis termed as

(a) Clean Bill of Exchange (b) Documentary Bill ofexchange

(c) Usance Bill of Exchange (d) none of the above

18. Indian Council for Arbitration was set up in

(a) 1963 (b) 1965 (c) 1968 (d) 1970

19. ------------ was established in 1934 for thepurpose of standardization of creditterms

offered by different countries

(a) Berne Union (b) European Union (c) W.T.O (d) Standard and Poor

20. Which is the apex financial institution for promotion and development of smallscale

industries

(a) IDBI (b) NABARD (c) SIDBI (d) IFC

21. The operations of letter of credit have been regulated and governed by

(a) uniform customs and practice for documentary credits (b) FEMA

(c) Export Import Policy (d) Free trade agreement

22. What does the term ‘matching’ refer to?

a) The coupling of two simple financial instruments to create a more complex one.

b) The mechanism whereby a company balances its foreign currency inflows and

outflows.

c) The adjustment of credit terms between companies

d) Contracts not yet offset by futures contracts or fulfilled by delivery.

23. An agreement which guarantees an investor a minimum return on a principal amount is

called a:

a) Stock option b) Executive stock option

c) Cap d) Floor

24. The degree of political risk faced by a European company operating in an Asian country:

a) may be specified objectively by using a political risk index;

b) depends on how the firm has structured and financed its Asian operations;

c) is given by the net present value of the Asian investment divided by the present

value of cash flows relating to the political risk factor.

d) depends on the benefits provided by the firm;

25. Which of the following is (are) motivation(s) for making direct investments?

a) Raw material seeking

b) Market seeking

c) Knowledge seeking

d) Production cost efficiency seeking

5 Marks Questions

1. Write a brief note highlighting special problems of developing countries in financing

foreign trade. Also indicate possible ways out.

2. Distinguish between pre-shipment and post-shipment financing. Discus the procedure

followed by the commercial banks in this regard.

3. Write an essay on pre-shipment finance.

4. Discuss the effects of the central bank using monetary policy to control domestic inflation and the effects of this upon international trade.

5. Explain briefly the relationships between;

(i) exchange rates and interest rates;

(ii) exchange rates and inflation rates.

8 Marks Questions

1. Explain the role of EXIM Bank in foreign tradefinancing.

2. What are the procedures involved in obtaining pre& post -shipment finance.

3. Write on methods of quality control and pre-shipment inspection.