Examination Paper of Foreign Trade management
IIBM Institute of Business Management 7
IIBM Institute of Business Management
Examination Paper MM.100
Foreign Exchange Management
Part One:
1. It is established to help countries in reconstructing their economies in the post World War II?
a. International Monetary Fund
b. World Bank
c. International Finance Corporation
d. International Development Association
2. The exchange rates which is variable between currencies and determined by demand and supply
a. Floating Exchange Rate System c. Fixed Exchange Rate System
b. Free Float d. Managed float
3. The branches which do not maintain independent foreign currency accounts but have powers to
operate the accounts falls under
a. Category A c. Category B
b. Category C d. Category D
4...
10. Hedging aims to
a. Increase Profits c. Reduce Costs
b. Maximize Profits d. Minimize Risk
Part Two:
1. Differentiate between Forward Rates and Expected Spot Rates?
2. Write a note on ‘Swaps’?
3. Differentiate between Bid Rate and Ask Rate?
4. Write a note on ‘Interest Rate Parity’?
Caselet 1
International asset swaps can be used to achieve international diversification without eroding the level
of foreign exchange reserves and weakening local market development. These asset swaps demand
limited foreign currency flows, which implies that there is a need for only net gains or losses to be
exchanged. Asset swaps protect foreign investors from market manipulation and expropriation risk and
have much lower transaction costs than outright investments. In spite of all this, asset swaps are
constrained by the attractiveness of local markets to foreign investors, and by various regulatory issues
covering counter-party risk, collateral considerations, accounting, valuation, and reporting rules.
Institutional investors, especially pension funds and life insurance companies, are becoming the major
participants in the financial systems of many developing countries. In some cases like Egypt, Malaysia or
...
Asset swaps are clearly a second best option compared to the lifting of exchange controls. Developing
countries should consider authorizing their institutional investors to engage in international asset swaps.
But they should authorize to use properly designed swap contracts, preferably based on the basket of
liquid securities, permit only global investment banks to act as counter-parties, require use of global
custodians, properly monitor credit risk, maintain adequate collateral, and adopt market-to-market
valuation rules.
Questions
Q 1. How does the international asset swap mechanism work? Explain.
Q2. Discuss the various benefits of international asset swaps.
Caselet 2
The RBI held the view, for long, that strong exchange reserves need to be maintained, due to the bad
experience India had to go through in 1991. It has been a widely known policy of the RBI to keep
accumulating dollar reserves, whenever there are strong inflows of foreign funds, which also ensures
that the rupee does not appreciate much. The policy has, over the years, resulted in the foreign
Examination Paper of Foreign Trade management
IIBM Institute of Business Management 10
exchange reserves increasing to over $100 billion. However, this policy has also led to the RBI being
criticized for interfering in the foreign exchange markets too often.
Several justifications have been given for this policy. The first one, as mentioned in the opening
sentence, is the lack of confidence in the international architecture. That is, the liquidity support
available to a country when it suffers from Balance of Payments problems could be inadequate, not
available when needed urgently, or be set with political preconditions not acceptable to the country
facing the problems. The second reason is often the desire to contain the risks that may arise from
external shocks. External private capital often comes in when the country is doing well and exits at the
first indication of trouble. Having large reserves is essential to contain the panic conditions that prevail
in the markets in such situations. The third reason is ... the
FIIs in debt funds is limited to $1 billion, all the FIIs put together. This cap prevents them from making
any meaningful arbitrage gains. The variability in interest rates in the two currencies involved, keeping in
view the narrow spreads, can add risk to the seemingly risk-less arbitrage. In view of these arguments, it
can be said that the flow of dollars into India is driven by factors other than the strength of the rupee
and the resultant opportunities for arbitrage.
Examination Paper of Foreign Trade management
IIBM Institute of Business Management 11
Questions
-
Q 1. What measures according to you the RBI should take to manage rupee-dollar exchange rates?
Q2. Do you think appreciation of rupee against dollar have any significant adverse impact on the Indian
economy? Discuss.
1. How many types of Exposures are there in terms of Exchange Risk?
2. Write a note on
??International Monetary Fund
??International Finance Corporation
??International Development Association
IIBM Institute of Business Management 7
IIBM Institute of Business Management
Examination Paper MM.100
Foreign Exchange Management
Part One:
1. It is established to help countries in reconstructing their economies in the post World War II?
a. International Monetary Fund
b. World Bank
c. International Finance Corporation
d. International Development Association
2. The exchange rates which is variable between currencies and determined by demand and supply
a. Floating Exchange Rate System c. Fixed Exchange Rate System
b. Free Float d. Managed float
3. The branches which do not maintain independent foreign currency accounts but have powers to
operate the accounts falls under
a. Category A c. Category B
b. Category C d. Category D
4...
10. Hedging aims to
a. Increase Profits c. Reduce Costs
b. Maximize Profits d. Minimize Risk
Part Two:
1. Differentiate between Forward Rates and Expected Spot Rates?
2. Write a note on ‘Swaps’?
3. Differentiate between Bid Rate and Ask Rate?
4. Write a note on ‘Interest Rate Parity’?
Caselet 1
International asset swaps can be used to achieve international diversification without eroding the level
of foreign exchange reserves and weakening local market development. These asset swaps demand
limited foreign currency flows, which implies that there is a need for only net gains or losses to be
exchanged. Asset swaps protect foreign investors from market manipulation and expropriation risk and
have much lower transaction costs than outright investments. In spite of all this, asset swaps are
constrained by the attractiveness of local markets to foreign investors, and by various regulatory issues
covering counter-party risk, collateral considerations, accounting, valuation, and reporting rules.
Institutional investors, especially pension funds and life insurance companies, are becoming the major
participants in the financial systems of many developing countries. In some cases like Egypt, Malaysia or
...
Asset swaps are clearly a second best option compared to the lifting of exchange controls. Developing
countries should consider authorizing their institutional investors to engage in international asset swaps.
But they should authorize to use properly designed swap contracts, preferably based on the basket of
liquid securities, permit only global investment banks to act as counter-parties, require use of global
custodians, properly monitor credit risk, maintain adequate collateral, and adopt market-to-market
valuation rules.
Questions
Q 1. How does the international asset swap mechanism work? Explain.
Q2. Discuss the various benefits of international asset swaps.
Caselet 2
The RBI held the view, for long, that strong exchange reserves need to be maintained, due to the bad
experience India had to go through in 1991. It has been a widely known policy of the RBI to keep
accumulating dollar reserves, whenever there are strong inflows of foreign funds, which also ensures
that the rupee does not appreciate much. The policy has, over the years, resulted in the foreign
Examination Paper of Foreign Trade management
IIBM Institute of Business Management 10
exchange reserves increasing to over $100 billion. However, this policy has also led to the RBI being
criticized for interfering in the foreign exchange markets too often.
Several justifications have been given for this policy. The first one, as mentioned in the opening
sentence, is the lack of confidence in the international architecture. That is, the liquidity support
available to a country when it suffers from Balance of Payments problems could be inadequate, not
available when needed urgently, or be set with political preconditions not acceptable to the country
facing the problems. The second reason is often the desire to contain the risks that may arise from
external shocks. External private capital often comes in when the country is doing well and exits at the
first indication of trouble. Having large reserves is essential to contain the panic conditions that prevail
in the markets in such situations. The third reason is ... the
FIIs in debt funds is limited to $1 billion, all the FIIs put together. This cap prevents them from making
any meaningful arbitrage gains. The variability in interest rates in the two currencies involved, keeping in
view the narrow spreads, can add risk to the seemingly risk-less arbitrage. In view of these arguments, it
can be said that the flow of dollars into India is driven by factors other than the strength of the rupee
and the resultant opportunities for arbitrage.
Examination Paper of Foreign Trade management
IIBM Institute of Business Management 11
Questions
-
Q 1. What measures according to you the RBI should take to manage rupee-dollar exchange rates?
Q2. Do you think appreciation of rupee against dollar have any significant adverse impact on the Indian
economy? Discuss.
1. How many types of Exposures are there in terms of Exchange Risk?
2. Write a note on
??International Monetary Fund
??International Finance Corporation
??International Development Association
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