MISSION 100 DAYS

TOPICWISE EXAM NO 37
PART B
Module 7 - International Business and Finance
Exchange rate determination Theories and models of exchange rate-
Purchasing power parity theory-Asset market model Portfolio balancing model-
Exchange rate of rupee- recent trends in exchange rate –
convertibility of Indian Rupee-Hedging against foreign exchange exposure-
Q

1. Consider the following

Assertion (A): Exchange rates fluctuate due to changes in demand and supply in
the currency market.
Reason (R): Currency markets are influenced by factors such as trade,
investment, interest rates, and speculation.
A) Both A and R are true, and R is the correct explanation of A
B) Both A and R are true, but R is not the correct explanation of A
C) A is true, but R is false
D) A is false, but R is true
2. What is a forward exchange rate?
A) The exchange rate at the end of a financial year
B) The rate used for stock market transactions
C) A predetermined rate for a transaction at a future date
D) A rate set by the government for all foreign exchanges
3. Which of the following is mainly used to hedge against currency risk in future
investments?
A) Spot rate
B) Bank rate
C) Discount rate
D) Forward rate
4. Consider the following
Assertion (A): The spot exchange rate is used for currency exchanges that are to
be made at a future date.
Reason (R): Spot exchange rates are fixed at the time of preparing the forward
contract.
A) Both A and R are true
B) A is true, but R is false
C) A is false, but R is true
D) Both A and R are false
5. Which of the following is a long-run theory of exchange rate determination?
A) Balance of Payment Theory
B) Purchasing Power Parity Theory
C) Asset Market Model
D) Speculative Flow Model
6. The Mint Parity Theory is based on:
A) Free market principles
B) Exchange of paper currency
C) Gold or metallic standard of currency
D) Floating exchange rate
7. The forward exchange rate is used for:
A) Daily retail transactions
B) Immediate purchases only
C) Currency exchanges two days after a trade
D) Setting a future exchange rate to avoid fluctuations
8. In the Mint Parity Theory, the term mint price refers to:
A) Price of currency in foreign exchange market
B) Market value of currency
C) Official price at which currency is convertible to gold
D) Printing cost of currency notes
9. Which of the following is a short-run theory of exchange rate determination?
A) Interest Rate Parity Theory
B) Mint Parity Theory
C) Purchasing Power Parity Theory
D) Balance of Payment Theory
10. Consider the following
Assertion (A): Forward exchange rates help in protecting investments from
currency fluctuations.
Reason (R): Forward contracts fix the exchange rate for a transaction that
will happen in the future.
A) Both A and R are true, and R is the correct explanation of A
B) Both A and R are true, but R is not the correct explanation of A
C) A is true, but R is false
D) Both A and R are false
11. When is the spot rate most commonly used?
A) To pay future liabilities in foreign currency
B) To buy/sell currencies for immediate settlement
C) To speculate on currency trends
D) To calculate inflation
12. Which model considers exchange rate based on financial assets and investor
behavior?
A) Mint Parity Model
B) Monetary Approach
C) Asset Market Model (Portfolio Balance Model)
D) Price-Output Model
13. Interest Rate Parity Theory explains the relationship between:
A) Inflation and employment
B) Interest rates and forward exchange rates
C) Imports and exports
D) Money supply and taxation
14. According to Interest Rate Parity Theory, arbitrage is:
A) Common and profitable
B) Avoided due to exchange rate adjustment
C) Legal and promoted
D) Dependent on inflation
15. Which of the following involves the use of forward contracts to eliminate
exchange rate risk?
A) Uncovered Interest Parity
B) Purchasing Power Parity
C) Covered Interest Parity
D) Arbitrage Parity
16. Who proposed the Purchasing Power Parity Theory?
A) John Maynard Keynes
B) Karl Gustav Cassel
C) Milton Friedman
D) Adam Smith
17. PPP theory is based on the law of:
A) Diminishing returns
B) Opportunity cost
C) One price
D) Demand and supply
18. According to Absolute PPP, the exchange rate should equal:
A) Difference in interest rates
B) Ratio of price levels between two countries
C) Difference in GDP
D) Inflation minus taxes
19. Consider the following
Assertion (A): Interest Rate Parity Theory assumes no arbitrage opportunities
between countries.
Reason (R): The theory suggests that differences in interest rates are offset by
changes in forward exchange rates.
A) Both A and R are true, and R is the correct explanation of A
B) Both A and R are true, but R is not the correct explanation of A
C) A is true, but R is false
D) A is false, but R is true
20. Relative PPP accounts for:
A) Differences in gold reserves
B) Government policies
C) Transportation costs
D) Differences in inflation rates
21. Consider the following
Assertion (A): PPP Theory assumes that the purchasing power of different
currencies should be equal in equilibrium.
Reason (R): According to PPP, exchange rates adjust to reflect differences in
price levels between countries.
A) Both A and R are true, and R is the correct explanation of A
B) Both A and R are true, but R is not the correct explanation of A
C) A is true, but R is false
D) Both A and R are false
22. Consider the following
Assertion (A): The Balance of Payments (BOP) theory is also known as the
Demand and Supply Theory of Exchange.
Reason (R): BOP theory assumes that the exchange rate is determined by the
interaction of demand and supply in the foreign exchange market.
A) Both A and R are true, and R is the correct explanation of A
B) Both A and R are true, but R is not the correct explanation of A
C) A is true, but R is false
D) Both A and R are false
23. Consider the following
Assertion (A): Under a flexible exchange rate system, BOP disequilibrium is
automatically corrected by currency value changes.
Reason (R): A deficit in BOP leads to depreciation of domestic currency, which
eventually restores balance by increasing exports and reducing
imports.
A) Both A and R are true, but R is not the correct explanation of A
B) Both A and R are true, and R is the correct explanation of A
C) A is true, but R is false
D) Both A and R are false
24. The Monetary Approach to Exchange Rate was primarily developed by:
A) Karl Gustav Cassel and Milton Friedman
B) David Ricardo and Adam Smith
C) Robert Mundell and Harry Johnson
D) Jacob Viner and J.M. Keynes
25. According to the Monetary Approach, the exchange rate is determined by:
A) Government-imposed exchange limits
B) Gold reserves
C) Relative demand and supply for national money stocks
D) Interest rate differentials
26. What is assumed to be constant in the monetary approach?
A) Inflation
B) Trade deficits
C) Money multiplier and velocity of money
D) Exchange rate
27. Under the flexible exchange rate system, a Balance of Payments (BOP) deficit is
corrected through:
A) Government borrowing
B) Increase in interest rates
C) Automatic depreciation of domestic currency
D) Import bans
28. The Portfolio Balance Approach is an extension of which theory?
A) Purchasing Power Parity Theory
B) Balance of Payments Theory
C) Monetary Approach
D) Keynesian Approach
29. The Portfolio Balance Approach was originally developed by:
A) Mundell and Fleming
B) Gustav Cassel
C) William Branson and Penti Kouri
D) Harry Johnson and Robert Mundell
30. In response to the 1990 crisis, India devalued its currency and introduced:
A) Capital account convertibility
B) Liberalized Exchange Rate Management System (LERMS)
C) Fixed exchange rate regime
D) Crypto trading policies
31. Which of the following exchange rate systems is followed in India?
A) Fixed exchange rate with gold standard
B) Fixed but adjustable exchange rate
C) Managed floating exchange rate /Dirt float
D) Free float
32. Transaction exposure arises mainly from:
A) Changes in tax rates
B) Financial statements consolidation
C) Import and export transactions
D) Local government policy
33. Which of the following is an internal hedging technique?
A) Currency swaps
B) Forward contracts
C) Leading and lagging
D) Futures contracts
34. Which hedging method involves buying or selling currency at a predetermined
future rate?
A) Futures
B) Options
C) Forward contracts
D) Forex swaps
35. What is a disadvantage of hedging?
A) Increases exchange rate risk
B) Increases volatility
C) Reduces profits due to costs
D) Requires no capital
36. Which of the following instruments gives the right but not obligation to buy or sell
currency?
A) Currency swaps
B) Options
C) Futures
D) Forward contracts
37. Which hedging technique works by matching receipts and payments in the same
currency?
A) Forex swap
B) Matching
C) Lagging
D) Currency option
38. Currency swaps involve:
A) Only exchange of principal
B) Exchange of interest rates only
C) Exchange of both principal and interest rates
D) No real exchange takes place
39. What does “do nothing” strategy assume?
A) No risk will occur
B) Market will always move favorably
C) Gains and losses will offset in the long term
D) Only gains will occur
40. Which strategy involves paying early or delaying payments based on expected
currency movements?
A) Netting
B) Matching
C) Leading and lagging
D) Currency swap
41. A call option gives the right to:
A) Sell a currency
B) Buy a currency
C) Exchange goods
D) Delay payment
42. Which market is used in a forward contract?
A) Spot market
B) Derivative market
C) Forward market
D) Commodity market
43. Which of these is an external hedging technique?
A) Matching
B) Leading
C) Currency options
D) Netting
44. The money market hedge uses:
A) Future exchange rates
B) Swap rates
C) Spot rate today
D) Inflation trends
45. Netting helps reduce:
A) Exchange volatility
B) Tax obligations
C) Transaction costs
D) Payment delays