OBJECTIVE TYPE QUESTIONS

Written by MANISH SAXENA and Dr Justin Paul

Multiple Choice Questions

1. Countries Currencies

A - China 1 - LiraB - Korea 2 - PesoC - Mexico 3 - WonD - Turkey 4 - Yuan

The correct country-currency pairing is

(a) A-1, B-3, C-4, D-2

(b) A-4, B-2, C-1, D-3

(c) A-2, B-4, C-3, D-1

(d) None of the above

2. Keeping other things constant, logic demands that US dollar should definitely become costlier when

(e) both US interest rate and US inflation rate decreases

(f) the US interest rate increases whereas the US inflation rate decreases

(g) the US interest rate decreases whereas the US inflation rate increases

(h) both US interest rate and US inflation rate increases

3. INCOTERMS are devised and published by

(a) International Chamber of Commerce

(b) World Bank

(c) World Trade Organization

(d) United Nations

4. In relation to INCOTERMS, which of the following is incorrect:

(a) Under the "E"-term (EXW), the seller only makes the goods available to the buyer at the seller's own premises.

(b) Under the "F"-terms (FCA, FAS and FOB), the seller is called upon to deliver the goods to a carrier appointed by the buyer.

(c) Under the "C"-terms (CFR, CIF, CPT and CIP), the seller has to contract for carriage, but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment or dispatch.

(d) Under the "D"-terms (DAF, DES, DEQ, DDU and DDP), the seller has to bear all costs and risks in avance needed to bring the goods to the place of destination.

(e) All are correct

5. A price agreed on CIF basis

(a) does not include the freight charges

(b) includes freight charges up to the port of loading

(c) includes freight charges up to the port of unloading (importer’s port)

(d) includes freight charges up to the importer’s works

6. Which of the following is not a party to a letter of credit:(a) Advising Bank

(b) Confirming Bank

(c) Governing Bank

(d) Issuing Bank

(e) Reimbursing Bank

7. 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

Fill in the Blanks

1. The _________ treaty, signed on February 7, 1992, was aimed at transforming the Economic and Monetary Union into a common Central Bank and a new currency.

(Maastricht)

2. Out of the 15 countries in the European Union, _________, ________ and _________ decided not to join the EMU, whereas _________, despite its desire to become a member, was unable to join as it did not meet the eligibility criteria relating to inflation, interest rates, exchange rates and fiscal deficit.

(Britain, Sweden, Denmark, Greece)

3. SWIFT stands for ______________.

(Society for Worldwide Interbank Financial Telecommunication)

4. _________, a company wholly owned by the Government of India, provides export credit insurance support to exporters and banks.

(Export Credit Guarantee Corporation)

5. _________ is a document through which the buyer’s bank guarantees invoice payments to a supplier; it promises to pay the beneficiary if the buyer fails to pay.

(Standby letter of credit)

6. The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations is known as _________ exposure.

(translation)

7. An exporter prepares the __________ to give an idea to the importer that “if you place the order with me and when I will export, your invoice will look like this”.

(proforma invoice)

8. _________ stock offering is the stock issued in the US (due to the liquidity of the new-issues market there) by non-US firms or governments.

(Yankee)

9. _________ are sold in countries other than the country represented by the currency denominating them.

(Eurobonds)

10. _________-style currency options are similar to _________-style options except that they can only be exercised on the expiration date.

(European, American)

True / False

1. An exchange rate between two countries’ currencies can get affected by changes in a third country’s interest rate.

True / False

2. The European Central Bank sets the monetary and fiscal policies for the EMU countries.

True / False

3. While using the currency diversification technique for reducing transaction exposure, the local currency value of future foreign currency inflows will be more stable if the foreign currencies received are highly positively correlated.

True / False

4. When firms reduce their economic exposure, they reduce not only the unfavourable effects of their home currency moving in a given direction but also the favourable effects if the home currency moves in the opposite direction.

True / False

5. Translation exposure can be reduced by selling forward the foreign currency used to measure a subsidiary’s income.

True / False

6. The forward premium (or discount) usually reflects the difference between the home and foreign interest rates.

True / False

7. While call option premiums increase with increase in the variability of the currency, for put option premiums the relationship is just opposite.

True / False

8. In direct intervention, governments directly influence the economic factors that affect equilibrium exchange rates.

True / False