Foreign Exchange Management – Question Bank

1. Explain Currency Option

2. What is meant by forward rate being an accurate predictor of future spot rate? Is it
different from unbiased predictor explain
3. A system of Floating Exchange Rate fails when the government ignores the verdict of
exchange market on their policies and resort to direct control over trade and capital
flows'. Comment. Explain Put-Call Option Interest Rate Parity
4. Among the three exposures translation, Transaction, Economic which is the easiest and
which is difficult? Give your reasoning.
5. "It makes sense to borrow during times of high inflation because you can repay loan in
cheaper Rupees.' Comment.
6. Explain Balance of Payment - Domestic savings and Investment.
7. Nominal rate causes real exchange rate changes. Discuss in relation to Equilibrium
Approach to Exchange Rates,
8. Domestic savings and Investment affects the Balance of Payment. Comment in relation to
capital inflows and out flows.
9. Explain the production and marketing strategies to cope with foreign exchange risk.
10. Explain the difference between Future contracts and forward contract.
11. Multinational firms can always reduce foreign exchange exposure risk faced by their
foreign affiliates by borrowing in local currency Comment in relation to the exposures.
12. Countries with high inflation need to keep devaluing their currencies to maintain
competitiveness. But countries that try to maintain their competitiveness by their
currencies only end up with higher inflation. Discuss.
13. Explain Government Budget and current Account Deficit on Balance of Payment
14. Interest Rate Parity
15. Gold Standard in International Monetary System
16. Explain Economic Exposure.
17. Forward Contract
18. Transaction Exposure
19. Money Market Hedge
20. Explain Translation Exposure.
21. Importance of International Finance
22. Explain Balance of Payment.
23. What is the difference between forward and futures contract?
24. Explain Translation Exposure.
25. Explain any one exposure management techniques.
26. Explain currency and interest rate swaps.
27. Explain Currency Futures and its application in Foreign Exchange Market.
28. Explain any one of the Technical Analysis methods to forecast exchange rate.
29. Explain the meaning of the terms :
 a. Spot – forward rates
b. Cross rates

c. Write short note on

a. Bid – Ask Spread
b. Direct & Indirect Quote
30. What are the methods used for forecasting exchange rates?
31. Explain Currency Futures and its application in Foreign Exchange Market.
32. Explain any one of the Technical Analysis methods to forecast exchange rate.
Numericals:
Q. 1. On July 2, 1997, the Thai baht fell 17% against the U.S. dollar. By how much has the dollar
appreciated against the baht?
Q. 2. April 1, 1998, was an ill-fated date in Yugoslavia. On that day, the government devalued
the Yugoslav dinar, setting its new rate at 10.92 dinar to the dollar, from 6.0 dinar previously. By
how much has the dinar devalued against the dollar?
Q.3. The afghani, Afghanistan's currency, has a perverse tendency to go up whenever sitting
govern ments fall. So as soon as commentators labeled Osama bin Laden the prime suspect in the
September 11 World Trade Center attack, currency traders figured that the Taliban would
become a target of the United States, bringing prospects of a new government and, perhaps,
economic development-and a rise in the afghani's value. So it has. Under the Taliban, the
exchange rate-quoted as the number of Pakistani rupees it takes to buy 100,000 afghanis fell to
around 85 rupees. September 11 galvanized the market. By mid-November 2001, military gains
by the Northern Alliance opposition pushed the exchange rate up to 165. By how much had the
afghani appreciated against the rupee?
Q. 4. Between 1982 and 2006, the ¥/$ exchange rate moved from ¥249.05/$ to ¥116.34. During
this same 25-year period, the consumer price index (CPI) in Japan rose from 80.75 to 97.72 and
the U.S. CPI rose from 56.06 to 117.07.
a. If PPP had held over this period, what would the ¥/$ exchange rate have been in 1995?
Q.5. The interest rate in the United States is 10%; in Japan, the comparable rate is 7%. The spot
rate for the yen is $0.003800. If interest rate parity holds, what is the 90-day forward rate?
Q.6. The pound sterling quoted at $1.8419-28.
What is the bid price?
What is the ask price?
What is the percentage spread?
Q.7. Give the cross rate for Japanese Yen to South Korean won for which the European quotes
for the Japanese yen and the South Korean won are as follows:
Japanese yen : ¥105.62/U.S.$
South Korean won: W1040.89/U.S.$
Q.8. Suppose that the Brazilian real is quoted at R 0.9955-1.0076/U.S.$ and the Thai baht is
quoted at B 25.2513-3986. What is the direct quote for the real in Bangkok?
Q.9. The spot Japanese Yen on May 19, 2020 sold at $ 0.009585
180 day forward yen = $0.009673
British pound spot $ 1.9479
90 day British pound $ 1.9334

What is the forward premium on 180 - day Japanese yen?

What is the forward discount on 90 – day British pound?
Q.10. Suppose sterling is quoted at $1.9519-36, and the Swiss franc is quoted at $0.9250-67.
What is the direct quote for the pound in Zurich?
Q.11. Suppose a customer wants to sell 30-day forward euros against yen delivery. The market
rate (expressed in European terms of foreign currency units per dollar) are as follows:
€:$ spot 0.81070-0.81103
30-day forward 0.81170-0.81243

¥:$ spot 107.490-107.541

30-day forward 107.347-107.442
Find the forward cross rate for Yen in terms of Euros.