Question Paper International Finance and Trade I (221) October 2004

Section A : Basic Concepts (30 Marks)

This section consists of questions with serial number 1 -30.
Answer all questions.
Each question carries one mark.
Maximum time for answering Section A is 30 Minutes.
1.A country experiencing hyper inflation should see a rapid
(AAppreciationof itscurrency (b)
Decreaseinits nominal interest rates(c)
Increase in its real asset prices (d)
D e v a l u a t i o n o f i t s c u r r e n c y (e) both (a) and (b) above.
< Answer>D
2.The US economy which is undergoing a huge trade deficit is currently financing it
by(a)Selling domestic assets like bonds, stocks and real estate to foreign
investors(b)Buying foreign assets like bonds, stocks and real estate( c ) R e t i r i n g
stocks and bonds held by foreigners ( d ) F o r e i g n
aid( e ) I M F l o a n .
< Answer>A
3.Brazil has a comparative advantage in coffee if (a)It produces more coffee than its
trading partner (b)It has more land to grow coffee then its trading partner (c)It
produces coffee at a lower opportunity cost than its trading partner (d)It produces
coffee at a higher opportunity cost than its trading partner (e)It produces less coffee
at a higher cost than its trading partner.
< Answer>C
4.An import quota is( a ) A t a x o n i m p o r t e d g o o d s ( b ) A b a n n o t t o i m p o r t
s u c h g o o d s ( c ) A f l a t d u t y o n i m p o r t s (d)A limit on the number of units that
can be imported( e ) A t a r i f f b a r r i e r .
< Answer>D
5.According to the Heckscher-Ohlin model, the source of comparative advantages is a
countrys(
a
)
T
e
c
h
n
o
l
o
g
y
(
b
)
H
u
m
a
n
c
a
p
i
t
a
l
( c
)
F a c t o r
e n d o w m e n t s ( d )
A b i l i t y
t o
p u b l i c i z e
i t s
p r o d u c t s (e)
Both (a) and (b) above.
< Answer>C
6.If a country adopting a fixed exchange rate has a balance of payments deficit, then in order to
maintain the exchange rate the central bank must( a ) S u p p l y f o r e i g n e x c h a n g e t o t h e
market(b)Demand foreign exchange from the market(c)Supply domestic
currency to the market(d)Neither supply nor demand foreign
e x c h a n g e ( e ) N e i t h e r s u p p l y n o r d e m a n d d o m e s t i c c u r r e n c y.
< Answer>A
7.Trade involving financial assets and international investments is recorded in the
_____ account.(
a
)
C
u
r
r
e
n
t
(
b
)
C
a
p
i
t
a
l
(
c
)
U
n
i
l
a
t
e
r
a
l
t
r
a
n
s
f
e
r
s
(
d
)

M
e
r
c
h
a
n
d
i
s
e
(
e
)
S
e
r
v
i
c
e
s
.
< Answer>B
8.Which of the following statements istrue
?(a)If the current account is in surplus, then capital account must also be in
surplus(b)If the capital account is in deficit, then current account must also be in
deficit(c)The overall sum of all the entries in the balance of payments must be
positive(d)The overall sum of all the entries in the balance of payments must be
negative(e)The overall sum of all the entries in the balance of payments must be
zero.
< Answer>E
9.Which of the following isfalseunder a currency board system
(a)The interest rates are automatically set by the market mechanism (b)The Central
Bank of a country cannot act as the lender of the last resort(c)Exchange rates under
the currency board system are stable(d)Lending to either the Government or
the domestic banks by the board is not allowed(e)When there is a higher demand for
the anchor currency, the reserves with the currency board get enhanced.
< Answer>E
10.Which of the following forms of purchasing power parity states that changes in spot rates
over a period of time reflect the changes in the price levels over the same period in the currencies
of the concernedeconomies?
( a )
A b s
o l u t
e
f o r
m ( b )
E x p e
c t a
t i o n s
f o r
m
( c )
R e l a t i v e
f o r m ( d )
B o t h
( a )
a n d
( b )
a b o v e (e) Both (b) and
(c) above.
< Answer>C
11.Which of the following risks is/are classified by Export Credit Guarantee Corporation as
political risk?( a ) B u y e r s f a i l u r e t o a c c e p t t h e g o o d s ( b ) I n s o l v e n c y o f t h e
b u y e r ( c ) C a n c e l l a t i o n o f a v a l i d i m p o r t l i c e n s e (d)Buyers failure to make
the payment within the due date( e ) B o t h ( a ) a n d ( d ) a b o v e .
< Answer>C
< Answer>
< Answer>
14.According to the Monetary Approach of exchange rate forecasting, inflation is the outcome
of ( a ) I n c r e a s e i n w a g e s i n t h e e c o n o m y ( b ) I n c r e a s e i n r e a l o u t p u t
g r o w t h ( c ) I n c r e a s e i n g o v e r n m e n t s p e n d i n g (d)Adverse effect of political
factors on the economy(e)Increase in money supply in excess of real output growth.
< Answer>E
15.Which of the following is/are the reason(s) for the J-Curve effect?(a)The inelastic nature
of short-run foreign demand for exported goods allows export businesses to achieve a
temporary unfair advantage(b)The elastic nature of short-run foreign demand for
exported goods allows export businesses to achieve a temporary unfair advantage
< Answer>D
(c)The elastic nature of short-run foreign demand for exported goods delays the
benefits that export businesses should realize(d)The inelastic nature of short-run

foreign demand for exported goods delays the benefits that export businesses should
realize( e ) B o t h ( a ) a n d ( b ) a b o v e .
16.Which of the following serves as an evidence that the goods have actually been imported into
India for
the remittance sent in foreign currency by an Authorized Dealer?
(
a
)
B
i
l
l
o
f
L
a
d
i
n
g
(
b
)
B
i
l
l
o
f
E
n
t
r
y
( c )
A i r
W a y
B i l l ( d )
C o m b i n e d
T r a n s p o r t
b i l l
o f
l a d i n g (e) House airway bill.
< Answer>B
17.A letter of credit which allows the Issuing bank to make payment to the beneficiary in
installments is known as( a )
R e d
c l a u s e
L / c ( b )
G r e e n
c l a u s e
L / c ( c )
R e v o l v i n g
L / c ( d )
T r a n s f e
r a b l e
L / c ( e )
D e f e r r e d
L / c .
< Answer>E
.19
Samurai bond is a bond( a ) D e n o m i n a t e d i n y e n a n d i s s u e d o u t s i d e
J a p a n (b)Denominated in a currency other than yen and issued to the public in
Japan(c)Denominated in yen and issued under Private placement by non-Japanese
borrowers in Japan(d)Denominated in yen and issued by non-Japanese borrowers to
the public in Japan(e)Denominated in yen and issued by Japanese borrower in US.
< Answer>D
20.If probability of positive NPV is high, the discount rate used in the APV method for
calculating the value of incremental borrowing capacity is( a ) T h e r i s k f r e e i n t e r e s t r a t e
i n t h e h o m e c o u n t r y (b)The risk free interest rate in the host
country( c ) C o m p e t i t i v e b o r r o w i n g r a t e i n t h e h o m e c o u n t r y (d)Competitive
borrowing rate in the host country( e ) C o s t o f c a p i t a l f o r t h e p a r e n t c o m p a n y.
< Answer>A
< Answer>
22.
Overshooting of exchange rates is explained by( a )
F i s h e r
o p e n
c o n d i t i o n ( b )
T r i f f i n s
p a r a d o x (c)
Dornbush sticky price theory(d) MarshallL e r n e r c o n d i t i o n (e) Asset approach.
< Answer>C
23.
Compensatory financing is( a ) A f o r m o f c o u n t e r t r a d e (b)A form of transaction
that involves asset transfer as a condition of purchase of goods
c)An IMF program to assist countries facing temporary shortfall in reserves(d)A
form of overdraft in foreign exchange given by RBI to authorized dealers ( e ) A f o r m
o f e l e c t r o n i c f u n d s t r a n s f e r.A N S - - C

24.
Free flow of not only goods but also factors of production is allowed among member nations in
the
case of (
a
)
F
r
e
e
t
r
a
d
e
a
r
e
a
(
b
)
C
u
s
t
o
m
s
u
n
i
o
n
(
c )
C o m m o n
m a r k e t ( d )
B o t
h
( a )
a n d
( b )
a b o v e (e) Both (b) and
(c) above.
< Answer>C
25.
According to UCPDC, the L/C issuing bank while issuing L/C, should clearly
indicate whether it is revocable or irrevocable. In the absence of such indication ( a ) T h e
c r e d i t s h a l l b e d e e m e d t o b e r e v o c a b l e (b)The credit shall be deemed to be
irrevocable(c)The credit shall be deemed to be 50% revocable and 50%
irrevocable(d)The credit shall be amended at the option of applicant(e)The credit
shall be amended at the option of beneficiary.
< Answer>B
26.
Which of the following statements is/are
false
?(a)SDR transactions involve no exchange of currencies but only book
entries(b)SDR is defined in terms of certain gold equivalent(c)Issue of SDRs to a
member country is in proportion to its quota in IMF( d ) S D R i s
a composite currency unit( e ) B o t h ( a ) a n d ( c ) a b o v e .
< Answer>B
27.
A loan which is arranged through public arrangement between lending banks and a borrower is
known
as(
a
)
C
l
u
b
l
o
a
n
(
b
)
S
y
n
d
i
c
a
t
e
d
e
u
r
o
c
r
e
d
i
t
( c )
N o t e
I s s u a n c e
f a c i l i t y ( d )
M u l t i p l e
c o m p o n e n t
f a c i l i t y (e) Commercial paper.
< Answer>B
28.
A banker who relied on the inter bank rate of Rs./$ 46.06/10 is requested by an Exporter for
purchase of dollars. What is the rate to be quoted if the banker wants a margin of 0.10%?
( a )
R s . 4 6 . 1 1 ( b )
R s . 4 6 . 0
1 ( c )
R s . 4 6 . 1 5 ( d )
R s . 4 6 .
0 5 ( e )
R s . 4 6 . 1 0 .
< Answer>B
29.
Which of the following theory(ies) of exchange rate states that the changes that are expected to
occur in the value of a currency in future, gets reflected in the exchange rates immediately?
(
a
)
D
e
m
a
n
d

s
u
p
p
l
y
(
b
)
M
o
n
e
t
a
r
y
( c )
P o r t f o l i o
b a l a n c e ( d )

E f f i c i e n t
m a r k e t
h y p o t h e s i s
a p p r
o a c h (e) Both (a) and (d) above.
< Answer D
30.
If the outright forward rate of US $ for 3 months is Rs.46.10/13 and the relevant
swap points are 5/6 paise, then the spot rate
is( a )
4 6 . 1 5 / 1 9 ( b )
4 6 . 1 6 / 1
8 ( c )
4 6 . 0 5 / 0 7 ( d )
4 6 . 0 4 /
0 7 ( e )
4 6 . 0 5 / 0 8 .
< Answer>C
END OF SECTION A
A