Forex Banking


  1. “A sound financial system is the backbone of a developing economy”. Do you agree with the statement? Give your arguments by illustrating each of them.
  1. The forex markets are different kinds of markets where customers are connected globally. Elaborate.
  1. More the risks more are going to be the returns. What types of risk exist in the international foreign exchange markets? Do we have any risk management system as well?
  1. How the currency exchange rates are determined? What role is played by the interest rates in determining the exchange rates? Explain by giving an practical example.
  1. Assume zero transaction costs:

A: ¥/U$ = 106.50, B: C$/U$ = 1.3215 , C: ¥/C$ = 82.905

a) Determine if triangular arbitrage is feasible.

b) State what you would do to profit from arbitrage.

c) Obtain the percentage profit possible.


  1. “Financial markets need to be regulated and controlled”. Do you agree with the statement?

a) Elaborate by explaining the types of financial markets and role of central bank in an international scenario

b) Also can you relate the regulation with the recent global financial crisis?

  1. What do you mean by term structure of interest rates? Explain three main theories of the term structure that have been proposed.
  1. What do you understand by: SLR, CRR, Deposit creation, Repo & Reverse Repo rate. Explain these terms through a balance sheet of a bank?

Case Study

1. The various rates of financial products are:

Gold – $735/Oz; Gold – Rs. 13000/10gms; Re/USD – Rs. 48; Oil – $148

Analyze the rate fluctuation in the price of above products & prepare a report for data between Feb 2008 to 31 march 2009.

2. The following info is available




1. A CHF payable

1 month


2. A CHF deposit

3 month


3. A CHF receivable

1 month


4. A CHF forward sale

6 month


5. A CHF loan

6 month


6. A CHF payable

9 months


7. A CHF forward purchase

9 months


8. A CHF loan

12 months


Incase of a deposit or a loan, the amount is the maturity value which includes interest and the principal. The CHF interest rate is 6% for all maturities and is known to remain at this level with certainty.

You are required to work out a neat forex transaction plan for next one year to ensure smooth receipts and payments by the British company.


1. Which of the following is an example of foreign exchange?

a) Exchange of cash issued by a foreign central bank.

b) Exchange of claims denominated in another currency.

c) Exchange of bank deposits.

d) All of the above.

2. US firms often find that borrowing from foreign markets:

a) is disadvantageous because the exchange rate risk increases the cost of borrowing.

b) is about the same as borrowing domestically.

c) is more expensive.

d) is less expensive.

3. Forex trading is always done in pairs?

a) Yes

b) No

4. The risks of losing money in Forex trading is high, but it is controllable Through

a) Proper education and training


c) Black marketing

5. If Euros are quoted at price $1.2055 in Citibank in New York, this means that:

a) large banks will quote their own rate while small banks will follow the lead of Citibank.

b) every other bank is quoting the same price.

c) this is the price used by the Central Bank.

d) most banks will probably be in that range.

6. Which of the following are usual suppliers of Euros?

a) US foreign investors remitting profits.

b) European direct investors.

c) US exporters.

d) All of the above.

7. The vast majority of large-scale foreign exchange transactions in the US are:

a) done through foreign exchange brokers.

b) done through Morgan-Chase and Deutsche Bank of America.

c) done through Interbank.

d) done through the Chicago Mercantile Exchange

8. If a company contracts today for some future date of actual currency exchange, they will be making use of a:

a) stock rate.

b) variable rate.

c) futures rate.

d) forward rate.

9. Which of the following might affect the cost of a trip to Japan by a resident of Britain?

a) The depreciation of the Euro.

b) The time at which the British resident purchases Yen.

c) The depreciation of the US dollar.

d) All of the above.

10. A company that functions to unite sellers and buyers of foreign currency-denominated bank deposits is called:

a) a broker.

b) an investor.

c) a wholesaler.

d) a bank

11. _____________ contracts are more widely accessible to firms and individuals than ____________ contracts.

a) Futures; forward

b) Forward; futures

c) Forward; arbitrageur

d) Arbitrageur; forward

12. If the euro dollar deposit rate is 3% per year and the euro-euro rate is 6% per year, by how much will the euro be expected to devalue in the coming year?

a) 0.3%

b) 2.0%

c) 2.9%

d) 3.0%

13. According to which theory will differences in nominal interest rates be eliminated in the exchange rate?

a) The PPP.

b) The Fisher effect.

c) The Leontief paradox.

d) The combined equilibrium theory.

14. If inflation goes up in the US relative to other countries, it is expected that the price of the US dollar will:

a) increase.

b) remain the same.

c) fall.

d) may increase or decrease.

15. Which of the following is an exchange risk management technique through which the firm contracts with a third party to pass exchange risk onto that party, via instruments such as forward contracts, futures, and options?

a) Diversification.

b) Risk avoidance.

c) Risk transfer.

d) Risk adaptation.

16. What is the base interest rate paid on deposits among banks in the eurocurrency market called?

a) INEC.

b) EUIN.


d) INEU.

17. A commercial bank estimates that its net income suffers whenever interest rates increase. The bank is looking to use derivatives to reduce its interest rate risk. Which of the following strategies best protects the bank against rising interest rates?

a. Buying inverse floaters.

b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.

c. Purchase principal only (PO) strips that decline in value whenever interest rates rise.

d. Enter into a short hedge where the bank agrees to sell interest rate futures.

e. Sell some of the banks floating rate loans and use the proceeds to make fixed rate loans.

18. Company A can issue floating rate debt at LIBOR + 1 percent and can issue fixed rate debt at 9 percent. Company B can issue floating rate debt at LIBOR + 1.4 percent and can issue fixed rate debt at 9.4 percent. Suppose A issues floating rate debt and B issues fixed rate debt. They engage in the following swap: A will make a fixed 7.95 percent payment to B, and B will make a floating rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

a. A pays a fixed rate of 9 percent, B pays LIBOR + 1.5 percent.

b. A pays a fixed rate of 8.95 percent, B pays LIBOR + 1.45 percent.

c. A pays LIBOR plus 1 percent, B pays a fixed rate of 9.4 percent.

d. A pays a fixed rate of 7.95 percent, B pays LIBOR.

e. None of the answers above is correct.

19. Which of the following are not ways in which risk management can increase the value of a company?

a. Risk management can increase debt capacity.

b. Risk management can help a firm maintain its optimal capital budget.

c. Risk management can reduce the expected costs of financial distress.

d. Risk management can help firms minimize taxes.

e. Risk management can allow managers to maximize their bonuses.

20. Which of the following statements is most correct?

a. One advantage of forward contracts is that they are default free.

b. Futures contracts generally trade on an organized exchange and are marked to market daily.

c. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.

d. Answers a and c are correct.

e. None of the answers above is correct.

21. Multinational financial management requires that

a. The effects of changing currency values be included in financial analyses.

b. Legal and economic differences be considered in financial decisions.

c. Political risk be excluded from multinational corporate financial analyses.

d. All of the above.

e. Only a and b above.

22. . If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

a. Appreciate against the U.S. dollar.

b. Depreciate against the U.S. dollar.

c. Remain unchanged against the U.S. dollar.

d. Appreciate against other major currencies.

e. Appreciate against the dollar and other major currencies.

23. If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

a. 0.71

b. 1.41

c. 1.00

d. 2.81

e. 0.50

24. If the spot rate of the French franc is 5.51 francs per dollar and the 180-day forward rate is 5.97 francs per dollar, then the forward rate for the French franc is selling at a ________________ to the spot rate.

a. premium of 8%

b. premium of 18%

c. discount of 18%

d. discount of 8%

e. premium of 16%

25. The relationship between the exchange rate and the prices of tradable goods is known as the:

a) Purchasing-power-parity theory

b) Asset-markets theory

c) Monetary theory

d) Balance-of-payments theory

26. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be:

a) $.50 per pound

b) $1.00 per pound

c) $2.00 per pound

d) $8.00 per pound

27. A primary reason that explains the appreciationin the value of the U.S. dollar in the 1980s is:

a) Large trade surpluses for the United States

b) High inflation rates in the United States

c) Lack of investor confidence in the U.S. monetary policy

d) High interest rates in the United States

28. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:

a) An excess supply of that currency exists in the foreign exchange market

b) An excess demand for that currency exists in the foreign exchange market

c) The supply of foreign exchange shifts outward to the right

d) The supply of foreign exchange shifts backward to the left

29. The international exchange value of the U.S. dollar is determined by:

a) The rate of inflation in the United States

b) The number of dollars printed by the U.S. government

c) The international demand and supply for dollars

d) The monetary value of gold held at Fort Knox, Kentucky

30. Which of the following is an example of foreign exchange?

e) Exchange of cash issued by a foreign central bank.

f) Exchange of claims denominated in another currency.

g) Exchange of bank deposits.

h) All of the above.

31. Which of the following are usual suppliers of Euros?

e) US foreign investors remitting profits.

f) European direct investors.

g) US exporters.

h) All of the above.

Write “T” against the statements which are true and “F” against those which are false.

32. Accepting deposits is an essential function of a modern commercial bank.

33. Granting loan to the borrowers is not the main function of a bank.

34. Ancillary services are also known as supplementary functions of a commercial bank.

35. General utility services are called non-banking services.

36. Services rendered by banks to the general public constitute the main function of banks.

37. Bank charges some amount for the services rendered.

38. Bank cannot buy and sell shares and debentures on behalf of customers.

39. Bank stands guarantee against loan raised by its customers from other financial institutions.

40. Is there a central location for the Forex Market?