International Finance And Treasury — Part 1 MCQs with Explanations

The world’s four major trading currencies are all free to float against each other. They include all the following except The Spanish Peso.

International bank for Reconstruction and Development is not a profit maximizing business. The International Bank for Reconstruction and Development (IBRD) is an international financial institution that offers loans to middle-income developing countries. The IBRD is the first of five member institutions that compose the World Bank Group, and is headquartered in Washington, D.C. in the United States.

Gifts and Relief are Transfer payment. A transfer payment is money paid to an individual who has not performed any service or rendered any goods for it. Transfer payments are ways for local, state, and federal governments to redistribute money to those in need. Transfer payments are considered income and are potentially taxable.

Nations that have major economic expansion attract Direct Foreign Investment. Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.

The term Euro currency Market refers to the market where the borrowing and lending of currencies take place outside the country of issue. The eurocurrency market is the money market in which currency held in banks outside of the country where it is legal tender is borrowed and lent by banks.

Bond issued simultaneously in several global financial center is Global Bond. A global bond is a type of bond that can be traded in a domestic or European market. It is a bond issued and traded outside the country where the currency of the bond is denominated. This type of bond is issued by a non-European company but sells in a European country or any other foreign market.

The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 190 member countries, with headquarters in Washington, D.C.

In a quote exchange rate, the currency that is to purchase with another currency is called Base currency. The base currency – also called the transaction currency is the first currency appearing in a currency pair quotation, followed by the second part of the quotation, called the quote currency or the counter currency.

Product cycle theory suggests that firms seek to penetrate new markets over time. The International Product Life Cycle Theory was authored by Raymond Vernon in the 1960s to explain the cycle that products go through when exposed to an international market. The cycle describes how a product matures and declines as a result of internationalization.

Yankee Bond is the US Dollar denominated bond issued in US domestic Market. Yankee bonds are registered & monitored by Securities & Exchange Commission (SEC). These bonds are usually issued by foreign banks, corporations & government.

Determination of forward rates is explained by Purchasing power parity theory. Purchasing Power Parity says that since they are the same goods, the purchasing power in the countries should be the same. This doesn't mean the exchange rate should be equal to one; it means the ratio of price to exchange rate should be one.

WTO institutions cannot be included in the international financial and monetary system. The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.

Cash and carry arbitrage explains the determination of Forward Rates for currencies. Cash-and-carry-arbitrage is a market neutral strategy combining the purchase of a long position in an asset such as a stock or commodity, and the sale (short) of a position in a futures contract on that same underlying asset.

International Monetary Fund is headquartered in Washington, United States, consisting of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world while periodically depending on World Bank for its resources.

The margin for a currency future should be maintained with the clearing house by both the buyer and the seller. Initial Futures Margin is the amount of money that is required to open a buy or sell position on a futures contract.

The marking to market in respect of a currency future refers to adjusting the margin money of buyer and seller to reflect the current value of futures. Currency futures are a exchange-traded futures contract that specify the price in one currency at which another currency can be bought or sold at a future date.

The marking to market of a futures contract is done daily, based on the closing price for the previous day. In Mark-to-Market accounting the asset values are determined according to market prices at the end of each day in order to arrive at the profit or loss status of the parties in a futures transaction.

In India currency-notes issue system is based on Minimum Reserve System. Under the Minimum Reserve System, the RBI has to keep a minimum reserve of Rs 200 crore comprising of gold coin and gold bullion and foreign currencies.

The European Economic Community (EEC) was a regional organisation that aimed to bring about economic integration among its member states. It was created by the Treaty of Rome of 1957.

Call option will be used by exporters with respect to currency option is wrong. Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.

A samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

An option is at the money (ATM) if the strike price is the same as the current spot price of the underlying security. An at-the-money option has no intrinsic value, only time value. For example, with an "at the money" call stock option, the current share price and strike price are the same.

The intrinsic value of a Call option is Underlying price - Strike Price. The intrinsic value of both call and put options is the difference between the underlying stock's price and the strike price. In the case of both call and put options, if the calculated value is negative, the intrinsic value is zero.

Britain did not become a member of the Economic and Monetary Union as on Jan 1 1999.

The acronym CIRCUS stands for Combined Interest Rate and Currency Swap. A Circus Swap is a common Forex transaction that's a combination of an interest rate swap and a currency swap in which a fixed-rate loan in one currency is swapped for a floating-rate loan in another currency.

Under the interest rate option, the buyer avoids unfavourable movement in interest rates and gains from favorable movement in interest rates. An interest rate option is a financial derivative that allows the holder to benefit from changes in interest rates. Investors can speculate on the direction of interest rates with interest rate options. It is similar to an equity option and can be either a put or a call.

An interest rate cap is a series of Call options. Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.

FRAs can’t be used for Hedging, Arbitraging and Speculating. FRAs are used to help companies manage their interest rate exposures. FRAs can be used by borrowers who have a desire or need to alter their interest rate or cash flow profile to suite their particular needs.

Euro is the official currency of all the states of European Union. The eurozone consists of 19 members who are EU members and use the euro. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The external method of hedging transaction exposure does not include Cross hedging. A cross hedge is used to manage risk by investing in two positively correlated securities that have similar price movements. The investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.

The cost of hedging through option includes Option premium and Interest on option premium till due date of the contract.

Foreign currency exposures can be avoided by denominating the transaction in domestic currency. Foreign Exchange Exposure refers to the risk associated with the foreign exchange rates that change frequently and can have an adverse effect on the financial transactions denominated in some foreign currency rather than the domestic currency of the company.

Forward contract is an agreement to buy or sell an assets on Specified price. A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset-management services to encourage private-sector development in less developed countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States. It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development.

For the purpose of translation exposure, historical rate is the rate prevalent on the date of the asset was acquired or the liability was incurred. Translation exposure (also known as translation risk) is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency.

Temporary method is not established method of translation. Temporal rate method, or the historical rate method, is employed to convert the financial statements of a parent company’s foreign subsidiaries from its local currency to its “reporting” or “functional” currency when the functional currency and the local currency are not the same. Temporal Method is also utilized at the time of acquisition of assets and liabilities.

Two tier exchange rate system is a form of Multiple exchange rate. In a multiple exchange rate system, the concept is the same, except the market is divided into many different segments, each with its own foreign exchange rate, whether fixed or floating.

International investments have less political risk than domestic investments is not a reason for international investment. International investing is an investing strategy that involves selecting global investment instruments as part of an investment portfolio. People often invest internationally to broaden diversification and spread investment risk among foreign markets and companies.

The forward market is especially well suited to offer hedging protection against transactions risk exposure. A forward market is an over-the- counter marketplace that sets the price of a financial instrument or asset for future delivery.

Time draft and Sight draft is not an example of an international trade draft. A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them. Sight drafts are used with both air shipments and ocean shipments for financing transactions of goods in international trade.