Sample Questions and Answers
What is the primary role of the ‘International Monetary Fund’ (IMF)?
A) To provide financial assistance to countries in need of balance of payments support and to promote global economic stability
B) To regulate cross-border financial transactions and trade agreements
C) To set global interest rates and control international lending
D) To serve as a central bank for international currencies
Answer: A
What is ‘currency devaluation’?
A) A deliberate reduction in the value of a country’s currency relative to foreign currencies, often by the government
B) The natural depreciation of a currency due to inflation
C) A rapid rise in the value of a country’s currency, caused by a sudden influx of foreign investment
D) The reduction of interest rates by a country to increase the value of its currency
Answer: A
What is the ‘law of one price’ in international finance?
A) The principle that identical goods should sell for the same price when expressed in a common currency, excluding transport costs and taxes
B) The idea that exchange rates will always adjust to reflect the price of goods in different countries
C) The rule that exchange rates must be regulated by central banks to prevent unfair competition
D) The assumption that price differences in different markets are always due to currency fluctuations
Answer: A
Which of the following describes ‘foreign direct investment’ (FDI)?
A) A long-term investment made by a company or individual in a foreign country, usually by acquiring a controlling interest in a foreign business
B) The short-term purchase of foreign financial assets for immediate gain
C) The investment in foreign exchange markets to capitalize on currency fluctuations
D) The practice of lending money to foreign governments or corporations
Answer: A
What is the ‘lender of last resort’?
A) An institution, typically a central bank, that provides emergency funding to financial institutions in trouble to prevent systemic collapse
B) A government agency responsible for lending to foreign countries during financial crises
C) A bank that lends to individuals who are unable to secure credit from other financial institutions
D) An international fund that assists developing countries in financing development projects
Answer: A
What is the ‘carry trade’ in international finance?
A) A strategy in which an investor borrows money in a low-interest-rate currency and invests in a high-interest-rate currency to earn the interest rate differential
B) A technique used by corporations to hedge against currency fluctuations by holding foreign assets
C) A practice of borrowing in foreign currencies to finance domestic investments
D) A method used by governments to adjust interest rates to influence exchange rates
Answer: A
Which of the following is the primary determinant of a country’s exchange rate under a ‘floating exchange rate system’?
A) Supply and demand for the country’s currency in the foreign exchange market
B) Government-imposed tariffs and quotas on foreign goods
C) The level of foreign reserves held by the central bank
D) The fiscal deficit or surplus of the country
Answer: A
What does ‘exchange rate risk’ refer to in international finance?
A) The possibility that changes in exchange rates could result in a loss when converting profits or assets into the home currency
B) The risk that a country will default on its foreign currency-denominated debt
C) The volatility of commodity prices in foreign markets
D) The danger that government interventions will distort currency prices
Answer: A
What is ‘currency intervention’?
A) The process by which a country’s central bank buys or sells foreign currencies to influence the exchange rate of its own currency
B) The policy of regulating cross-border capital flows to prevent capital flight
C) The imposition of restrictions on foreign exchange transactions to protect the domestic currency
D) The strategy of adjusting interest rates to stabilize the exchange rate
Answer: A
What is ‘political risk’ in international finance?
A) The risk that political changes or instability in a country could affect the value of investments
B) The risk associated with changes in government tax policies and regulatory frameworks
C) The risk of fluctuations in the global commodity markets impacting an economy
D) The risk of exchange rate movements impacting cross-border investments
Answer: A
Which of the following is a key feature of a ‘currency peg’?
A) A country’s central bank sets a fixed exchange rate for its currency against another currency or a basket of currencies
B) The central bank adjusts interest rates to control the value of the currency in foreign exchange markets
C) A government restricts the amount of foreign currency that can be bought or sold in the country
D) A currency is allowed to float freely based on market supply and demand
Answer: A
Which of the following is an example of ‘hedging foreign exchange risk’?
A) A company using forward contracts to lock in a future exchange rate for a foreign transaction
B) A company investing in foreign bonds to capitalize on higher interest rates
C) A government intervening in the foreign exchange market to stabilize the currency
D) A company diversifying its operations into multiple foreign countries to spread risk
Answer: A
What is ‘foreign exchange (forex) market’?
A) The market where currencies are traded and exchange rates are determined
B) The marketplace for trading stocks and bonds across national borders
C) The market for trading global commodities like gold and oil
D) The government-regulated platform for trading foreign debt securities
Answer: A
What does ‘interest rate parity’ suggest?
A) The difference between interest rates in two countries should be offset by the difference in their exchange rates over time
B) The exchange rate of a country will always remain stable in the long run, regardless of interest rate changes
C) Interest rates in different countries should always converge to a common rate
D) Higher interest rates always attract foreign investment, regardless of exchange rate fluctuations
Answer: A
What is the ‘balance of payments’?
A) A record of all economic transactions between the residents of a country and the rest of the world
B) A document showing a country’s stock of foreign currency reserves
C) A detailed list of the total foreign investment inflows into a country over a period
D) A measure of a country’s fiscal deficit or surplus
Answer: A
What is a ‘currency crisis’?
A) A situation in which a country experiences a rapid depreciation of its currency, often due to political instability or economic mismanagement
B) A period of sustained exchange rate stability in the foreign exchange markets
C) The devaluation of a country’s currency by its central bank to adjust for trade imbalances
D) The imposition of currency controls by a government to prevent capital flight
Answer: A
What is ‘arbitrage’ in international finance?
A) The practice of buying a currency or asset in one market and simultaneously selling it in another market at a higher price to profit from price differences
B) The process of adjusting exchange rates by central banks to stabilize the economy
C) The use of financial instruments to hedge against potential currency fluctuations
D) The strategy of investing in high-risk, high-reward foreign financial assets
Answer: A
What is ‘exchange rate manipulation’?
A) The act of a government or central bank artificially influencing the value of its currency to gain an economic advantage
B) The act of using foreign exchange reserves to stabilize a currency during a crisis
C) The process of allowing a currency to float freely based on market forces
D) The process of determining the most favorable exchange rates for international trade
Answer: A
What is ‘international diversification’?
A) The practice of spreading investments across multiple countries to reduce exposure to country-specific risks
B) The process of limiting investments to domestic markets to avoid foreign exchange risks
C) The method of investing in foreign currency markets to hedge against local market volatility
D) The strategy of concentrating investments in a specific foreign industry to take advantage of high returns
Answer: A
Which of the following best describes a ‘fixed exchange rate system’?
A) The exchange rate is set by the government or central bank and does not fluctuate based on market forces
B) The value of the currency fluctuates freely in response to market demand and supply
C) The currency is pegged to a specific set of commodities, such as gold or silver
D) The exchange rate is determined by international financial institutions, such as the IMF
Answer: A
What does ‘capital control’ refer to?
A) Government-imposed restrictions on the flow of capital across borders, such as limits on foreign investments or currency exchanges
B) The practice of borrowing foreign funds to finance a country’s public sector debt
C) The regulation of international financial markets by central banks
D) The control of government budgets to prevent excessive borrowing from foreign creditors
Answer: A
What is ‘currency appreciation’?
A) An increase in the value of a currency relative to other currencies, often due to higher demand or economic strength
B) A decrease in the value of a currency relative to other currencies
C) The government-mandated setting of exchange rates at a higher level
D) The practice of reducing interest rates to stimulate domestic currency value
Answer: A
Which of the following is a key feature of ‘multinational corporations’ (MNCs) in international finance?
A) They operate in multiple countries, and their financial decisions can be affected by exchange rates, tax policies, and foreign regulations
B) They only invest in domestic markets and are not affected by international financial conditions
C) They limit their foreign operations to currency trading and foreign exchange markets
D) They focus on managing government-controlled currencies rather than free market exchanges
Answer: A
What is ‘economic exposure’ in international finance?
A) The risk that a company’s financial performance will be affected by fluctuations in exchange rates
B) The risk that a country will default on its international debt obligations
C) The risk that inflation rates will affect the cost of production in foreign markets
D) The risk of political instability influencing trade relations between countries
Answer: A
What does ‘currency risk’ involve?
A) The potential for loss due to fluctuations in the value of a currency in international markets
B) The risk of a country’s central bank raising interest rates unexpectedly
C) The likelihood that the government will intervene to stabilize exchange rates
D) The risk that exchange rates will stabilize at unfavorable levels for international transactions
Answer: A
What is ‘exchange rate volatility’?
A) The degree to which the value of a currency fluctuates over time due to market forces or economic events
B) The process by which central banks intervene to stabilize a country’s currency
C) The ability of a country’s government to predict and control future exchange rates
D) The process of determining exchange rates through fixed government policies
Answer: A
What is ‘foreign exchange risk’ in multinational corporations?
A) The potential for a company’s profitability to be affected by fluctuations in currency exchange rates when doing business abroad
B) The risk of an increase in foreign taxes on profits from overseas operations
C) The risk associated with legal restrictions on capital flows between countries
D) The risk of investing in emerging markets with unstable economies
Answer: A
What does ‘international capital market’ refer to?
A) The global network of banks, institutions, and investors that facilitate the buying and selling of financial assets across borders
B) The government bonds market that facilitates the financing of foreign governments
C) The stock markets of major financial centers, such as New York, London, and Tokyo
D) The network of international trade agreements that impact financial flows
Answer: A
What is the ‘currency risk premium’?
A) The extra return an investor demands for taking on the risk of currency fluctuations in international investments
B) The cost of purchasing foreign currencies for trade
C) The difference in interest rates between countries
D) The premium paid for buying foreign currency options as a hedge against exchange rate movements
Answer: A
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