Chapter 1

1 Foreign Exchange is defined by the Oxford dictionary as

the money of another country
the goods of another country
Both of the above
None of the above

2 Section 2 (n) of FEMA states that foreign exchange includes:

deposits, credits and balances payable in any foreign currency,
drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in
Indian currency but payable in any foreign currency,
drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institution
s or persons outside India, but payable in Indian currency;
All of the above

3 Foreign exchange means the currency of another country and will include ___________________ den
letters of credit
bills
cheques
All of the above

4 Foreign exchange is the sum total of the foreign currency that a country earns both
on current account and capital account i.e. the balance on current account and capital
account together will result in the country's reserves of foreign exchange going up or
down correspondingly.
True
False

5 Foreign exchange is the foreign currency reserves available to a country for meeting
the requirements of its external trade
True
False

6 As trade crosses borders, the needs for currencies of other countries become import-
ant.
True
False
7 More often than not the transaction between two countries are often settled in the
currency of a third currency.
True
False

8 Which of the following is a fundamental one must be aware of while dealing in foreign
exchange:
The possession of the currency of a country is useful usually only in that country because
it is the legal tender of the country. The factor that distinguishes foreign currency from
other commodities is that in the country where it is legal tender it is money.
The exchange of one currency for another is consummated by banks by book keeping
entries done in the two centres concerned.
All exchanges of a currency for another are affected with the help of credit instruments.
All of the above

Give Your Comments

chapter 2

1 Gold was the means of international settlement for receipts and payments. A country
was on the gold standard if:
The Central Bank agreed to buy back the currency at a certain rate for gold.
The melting down of gold was freely allowed.
There was unrestricted import and export of gold.
The total money supply in the country was determined by the quantum of gold reserves
in the country.
All of the above

2 The ____________________ is the rate at which one currency is converted (bought or

sold in exchange) to another currency.
currency rate
exchange rate
conversion rate
none of the above

3 Exchange rate changes from

minute to minute
hour to hour
day to day
 month to month
All of the above

4 Exchange Rate is essentially dependent on _____________for the currency.

supply
demand
Both of the above
None of the above

5 If there is demand for a currency the value of that currency goes up.
True
False

6 Initially all currencies were based on the gold standard.

True
False

7 With the introduction of paper currency there was an implied understanding that the
currency note if submitted to the Central Bank could be converted into gold.
True
False

8 Exchange rates between currencies were frozen based on the gold exchange standard.
Given confidence in the ability and willingness of governments to exchange paper for
gold at a fixed rate, individuals were content to hold and use gold certificates.
True
False

Give Your Comments

chapter 3

1 Which of the following are true in regard to the Foreign Exchange Market?
The terms foreign exchange market is used in an abstract sense. It is more like the
National Stock Exchange where participants or members buy and sell foreign exchange
through communication devices.
It is screen based, genuinely international and open for business 24 hours a day.
There are many buyers and sellers; prices adjust rapidly and for the most part smoothly.
 Its net daily turnover is estimated at more than 10 times the total foreign currency
reserves of all IMF members – truly gargantuan.
All of the above

2 The purpose of the foreign exchange market is to permit transfers of purchasing

power denominated in one currency for another (i.e. to trade one currency for another
currency).
True
False

3 Which of the following statements are true in regard to the Foreign Exchange Market?
The foreign exchange market is not a physical place.
It is a worldwide wired network of banks, foreign exchange brokers and dealers, whose
function is to bring buyers and sellers of foreign exchange together.
It is not confined to one country.
It is dispersed throughout the leading financial centres of the world - London, New York
City, Tokyo, Frankfurt and Paris.
All of the above

4 Most currency transactions are channeled through the worldwide interbank market,
the wholesale market in which major banks trade with each other.
True
False

5 ______________ market is normally referred to as the foreign exchange market.

Interbank market
Spot Market
Forward Market
None of the above

6 In the ___________, settlements of transactions are done within two business days
after the transaction has been concluded.
Interbank market
Spot Market
Forward Market
None of the above
7 In the ________________ , the contracts are made to buy or sell currencies for future
deliveries.
Interbank market
Spot Market
Forward Market
None of the above

Give Your Comments

chapter 4

1 Which of the following factors cause rates to move?

market sentiment
the state of the economy
government policy
demand and supply
All of the above

2 Which of the following factors cause rates to move?

The Strength of the Economy
Political and Psychological Factors
Economic Expectations
All of the above

3 Which of the following factors cause rates to move?

4 The strength of the economy affects the demand and supply of foreign currency. If
an economy is growing fast and is strong it will attract foreign currency thereby
strengthening its own.
True
False

5 Political or psychological factors have an influence on exchange rates.

True
False

6 Exchange rates can also fluctuate if there is a change in government.

 True
False

Give Your Comments

chapter 5

1 Any transaction involving foreign exchange i.e., conversion or exchange of currencies

is known as a foreign exchange transaction.
True
False

2 A Foreign Exchange transaction is a transaction between where conversion of

currencies or exchange of one currency with another is effected.
a bank and its customer
between two banks
both of the above
none other above

3 An exchange rate is a rate at which one currency can be exchanged for another.
True
False

4 To calculate the selling price, the seller takes into account the acquisition cost of the
commodity and for calculating the buying price, he takes into account the disposal
price, as the basis.
True
False

5 When a bank quotes a price to the customer, it ascertains the price at which it can buy
the currency. It then adds its profit and then quotes a price.
True
False

6 Market rates change all the time and therefore no bank will keep the rate offered
open for any length of time. It has to be accepted or rejected immediately.
False
True
7 If the foreign currency is kept constant and the home currency is varied then it is
known as __________________.
a direct rate
an indirect rate
a cross rate
a ready or cash rate

8 ________________ expresses the number of units of the home currency in terms of a

single unit of a foreign currency.
a direct rate
an indirect rate
a cross rate
a ready or cash rate

Give Your Comments

chapter 6

1 Normally exchange rates are quoted at the

spot rate
forward rate
cross rate
none of the above

2 The settlement based on a ___________ takes place on the second working day after
the date of the transaction.
spot rate
forward rate
cross rate
none of the above

3 If the settlement is to be at a date after the spot date the rate quoted will be known as
the _________________.
spot rate
forward rate
cross rate
none of the above
4 Forward rates are arrived at taking into account:
The spot rate.
The interest rate differential between the spot rate and the forward date.
Both of the above
None of the above

5 The forward rate is determined by several factors:

The demand and supply for the currency at the settlement date. If there is likely to be a
demand the currency will be at a premium. On the other hand, if supply is expected to
be more the forward rate will be at a discount.
The interest rate differential between the countries during the period.
The market expectations about the currency, interest rates, the economy and foreign
exchange.
All of the above

6 If there is free movement of currencies between countries interest rate is likely to be

the most dominant figure and monies will move on the basis of interest that can be
earned.
True
False

7 Kenya as a country used to attract a lot of foreign exchange even though it is

economically very weak. This was because the country was paying very high interest
on deposits.
False
True

8 A profit can be made by taking advantage of forward differential points.

True
False

Give Your Comments

chapter 7

1 To pay banks in other countries banks keep in their vaults large amounts of foreign
currencies.
True
 False

2 Banks keep money with banks in other countries

True
False

3 My account with another bank is termed as:

Nostro Accounts
Vostro Account
Mostro Account
All of the above
None of the above

4 Another bank’s account maintained with our bank would be termed as:
Nostro
Vostro Account
Mostro Account
All of the above
None of the above

5 Nostro accounts are maintained by a bank with its overseas branch/correspondents

for settlement of foreign currency transactions.
True
False

6 Vostro accounts are maintained by a bank with its overseas branch/correspondents

for settlement of foreign currency transactions.
False
True

7 Nostro accounts in foreign centres are basically opened to settle foreign currency
transactions
True
False
8 The reconciliation of nostro accounts is not required.
True
False

Give Your Comments