1) Explain the concept of Balance of Payment?

Ans :

Balance of payment of a country is a systematic record of all the economic

transactions made between the residents of the country and the
residents of the rest of the world over a given period of time (generally
one year). It can also be said as the country total money receipt from and
payment to the foreigners.
Resident Includes individuals, corporate bodies and government
departments located in the country. (Exceptions Tourists, International
foundations IMF, UNESCO etc)
Economic transaction Transfer of ownership and possession of goods and
services from one party to another.

2) What is the importance of the Study of Balance of Payment

Ans:

Economic conditions
Exchange value of currency
International trade
Foreign exchange position
Economic policies of the government

3) Components of the Balance of Payment

Ans:Credits (+)
(Receipts)

Debits (-)
(Payments)
1. Current Account

Exports
(a) Goods
(b) Services
(c) Transfer payments

Imports
(a) Goods
(b) Services
(c) Transfer payments
2. Capital Account
(a) Borrowings from Foreign countries
(a) Lending to Foreign
countries
(b) Direct Investments by Foreign countries
(b)
Direct
Investment
Foreign countries
3. Official settlement Account
(a) Increase in Foreign official Holdings
(a) Increase in Official
reserve of Gold
Foreign currencies

4) Why and how is the BOP always balanced in an accounting sense and it may
be not balanced in an economic sense
Ans: In an accounting sense the BOP is always balanced because of the doubleentry system of accounting. While BOP is accounting sense is always
balanced there might be disequilibrium in an economic sense. As per the
economic sense there can be surplus or deficit in the BOP. The difference
in current account of BOP is restored through equivalent difference in
capital account.
5) Any 3 factors which effects the components of BOP (in Export/Import) in
current account and 2 factors which effects the components of BOP in capital
account
Ans:Factors effecting current account are
Prevailing exchange rate
Inflation rate
World process of commodity
Income of foreigners
Trade Barriers
Factors effecting the Capital account
Income on Investment
Transfer payments
Capital account transaction Return, Risk, Diversification, Movement in
exchange rates
6) What is the foreign exchange market and key features of the foreign
exchange market
Ans :

Foreign exchange market can be defined as a market within which

individuals, business firms, government and banks purchase and sell
foreign currencies and other debt instruments. It is basically an Over-the
Counter (OTC) market. Transactions are carried out through the
communication networks such as internet, telephone, telex etc.
Features of the Fx Market are
Global Market
24 Hours a day market
Size of the market daily turnover more than 1 Trillian $
Liquidity
Major currencies

Market participants Banks customers, Insurance companies, Banks,

Brokers
Role of Technology
7) Who are the participants in the foreign exchange market and what is their
role
Ans :

Business Houses export/imports

Commercial Banks Clients and their own
Exchange Brokers facilitate deals within bank provides quotations
Central Banks Do on its own or on behalf of the government
Investment Management firms

8) Different types of financial instruments or contracts used in the foreign

exchange market
Ans: Spot Contracts Actual exchange of currencies take place immediately.
Currencies are normally delivered on T+2. However the exchange rate
applicable is that rate of T date.
Direct Quote Rs. 60 = $1
Indirect Quote = $0.0167 = Rs.1
Forward ContractIs a contract in which one party enters into a contract
with other party to buy or sell a fixed amount of foreign currency at a
specified future date at a predetermined rate of exchange.
Futures Contract They are exactly similar to forward contract but are
standardized contract with standard contract size and maturity dates. The
futures trades happens on the exchange and the settlement is facilitated
by the clearing house of the exchange.
OptionsIt is a contract which gives the buyer of the option the right, but
not the obligation to buy or sell a particular currency at a pre-agreed
exchange rate, known as the strike rate within the specified period.
Call option The option that gives the right to buy the particular currency
is referred as call option.
Put Option The options that gives the right to sell the currency is referred
to as put option.
The buyer of the option has to pay a premium
SwapsTwo parties exchange a pair of currencies for a certain length of
time and agree to reverse the transaction at a later date.
9) 4 points of difference between futures and forwards
10)
Explain the activities of Arbitrage
11)
Explain the activities of Speculators
12)
Explain the activities of Hedgers