1. The "Real Effective Exchange Rate" (REER) is the Nominal Effective Exchange Rate (NEER) adjusted for:
Gold prices.
Foreign exchange reserves.
Interest rate differentials.
Inflation differentials between the home country and trading partners.
Explanation:
REER takes the NEER (weighted average of nominal exchange rates) and adjusts it for relative inflation rates. It is a better indicator of a country's trade competitiveness.
2. A "Forex Swap" transaction involves:
Simultaneous purchase and sale of identical amounts of one currency for another with two different value dates.
Only a forward sale of currency.
Only a spot purchase of currency.
Exchange of interest payments only.
Explanation:
A typical forex swap consists of a spot transaction and a simultaneous forward transaction in the opposite direction. It is used to manage liquidity or hedge risk without open currency exposure.
3. If the Forward Rate of a currency is higher than its Spot Rate, the currency is said to be trading at a:
Par
Deficit
Discount
Premium
Explanation:
When Forward Rate > Spot Rate, the currency is at a Premium. When Forward Rate < Spot Rate, it is at a Discount.
4. A "Non-Deliverable Forward" (NDF) is a forex derivative contract traded:
On Indian Stock Exchanges.
Over-the-Counter (OTC) in the domestic market.
In offshore markets (outside the country of the currency).
Directly with the RBI.
Explanation:
NDF markets (like in Singapore or London for INR) allow trading in currencies that have restricted convertibility. Settlement is done in a convertible currency (usually USD), with no delivery of the underlying domestic currency.
5. In India, if the exchange rate is quoted as "USD 1 = INR 82.50", this is an example of a:
Forward Rate
Cross Rate
Indirect Quote
Direct Quote
Explanation:
A Direct Quote expresses the price of one unit of foreign currency in terms of domestic currency (e.g., how many Rupees for 1 Dollar). India follows the Direct Quote system. An Indirect Quote would be INR 1 = USD 0.012.
6. The theory that states spot exchange rates change to equalize the purchasing power of currencies in their respective countries is called:
Interest Rate Parity Theory
Purchasing Power Parity (PPP) Theory
Fisher Effect
Balance of Payments Theory
Explanation:
PPP theory asserts that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. It is based on the "Law of One Price".
7. Currency Futures in India are traded on:
Only between banks.
Recognized Stock Exchanges (like NSE, BSE).
RBI's e-Kuber platform.
Over-the-Counter (OTC) market only.
Explanation:
Currency Futures are standardized contracts traded on exchanges (NSE, BSE, MSEI). In contrast, Currency Forwards are traded OTC between banks and clients.
8. The "Foreign Exchange Dealers Association of India" (FEDAI) primarily:
Decides the exchange rate of the Rupee.
Sets rules and regulations for inter-bank forex business and accredits forex brokers.
Regulates the RBI's forex policy.
Issues currency notes.
Explanation:
FEDAI is an association of banks dealing in forex. It frames rules for the conduct of inter-bank forex business and issues guidelines to Authorized Dealers, under RBI's overall supervision.
9. A "Nostro Account" implies:
Their account with them in third currency.
Our account with you in your currency.
Your account with us in our currency.
A joint account.
Explanation:
Nostro (Latin for "Ours") refers to a bank's account held in a foreign bank in that foreign country's currency (e.g., SBI holding a USD account with Citibank NY).
10. If the exchange rate of USD/INR is 82.00 and GBP/USD is 1.25, what is the implied "Cross Rate" for GBP/INR?
Explanation:
To find GBP/INR, we multiply GBP/USD by USD/INR. (1.25 * 82.00 = 102.50). This calculation is used when a direct quote between two currencies is not available or to check for arbitrage opportunities.
11. Which type of account allows an NRI to deposit income earned in India (like rent, dividends) and has restricted repatriability?
NRO Account
FCNR (B) Account
RFC Account
NRE Account
Explanation:
The Non-Resident Ordinary (NRO) account is for managing income earned in India. Interest earned is taxable, and repatriation is limited (currently USD 1 million per financial year). NRE accounts are for foreign earnings and are fully repatriable.
12. Under the Liberalized Remittance Scheme (LRS), what is the maximum amount a resident individual can remit overseas per financial year?
USD 250,000
USD 200,000
USD 500,000
USD 100,000
Explanation:
Resident individuals can remit up to USD 250,000 per financial year for permissible current or capital account transactions under LRS.
13. The rate at which a bank buys foreign currency from a customer (exporter/individual) is known as the:
Buying Rate (Bid Rate)
Inter-bank Rate
Cross Rate
Selling Rate
Explanation:
When a customer wants to convert foreign currency into rupees, the bank "buys" the FCY. The rate applied is the TT Buying Rate or Bill Buying Rate, which is lower than the selling rate.
14. "Arbitrage" in forex markets refers to:
Speculating on future price movements.
Hedging against risk.
Buying in one market and simultaneously selling in another to profit from price differences.
Borrowing in a low-interest currency.
Explanation:
Arbitrage exploits price inefficiencies between markets for risk-free profit.