Siva Sivani Institute of Management BIFAAS- III Semester IFM Quiz #3 Name of the student: Roll No : Answer the

following questions. Each question carries 1 mark. 1. In its absolute version, purchasing power parity states that price levels worldwide should be _______when expressed in a common currency. a. equal b. roughly equal c. different d. opportunities for arbitrage ANSWER: A 2. The theory of relative purchasing power parity states that, between two nations, the a. inflation rates are unrelated b. exchange rate differential reflects the inflation rate differential c. inflation rate is smaller in weaker currencies d. the interest rate is greater than the inflation rate during depreciations ANSWER: B 3. The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium. a. nominal exchange b. real exchange c. nominal interest d. adjusted dividend ANSWER:C 4. What is Direct Quotation? ANS: A direct exchange rate quote gives the home currency price of a certain quantity of the foreign currency quoted. 5. What factors influence currency exchange rates? Ans : The forex market is driven by supply and demand. The following factors can influence exchange rates: National economic performance Central bank policy Interest rates Trade balances imports and exports Political factors such as elections and policy changes Market sentiment expectations and rumours Unforeseen events terrorism and natural disasters

Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts.

6. Define Translation exposure.

Ans : It is also known as Accounting exposure. Gains and losses caused by the translation of foreign currency assets and liabilities into the currency of the parent company for accounting purposes.

7. Define Transaction exposure. Ans : It arises whenever a company is committed to a foreign currency denominated transaction entered into before the change in exchange rate. 8. What are the methods of translation exposure? The current rate method The monetary/non monetary method The temporal method The current/non current method

9. What are the Various methods to manage transaction exposure? Forward hedge Money market hedge Options market hedge 10. Define Call option and Put option. Call option gives the right to buy Put option gives right to sell