Q.1 What is the primary function of the foreign exchange market?
To regulate domestic inflation
To facilitate currency conversion for international trade
To determine domestic interest rates
To control government spending
Explanation - The foreign exchange market allows individuals, businesses, and governments to convert one currency into another to enable international trade and investment.
Correct answer is: To facilitate currency conversion for international trade
Q.2 Which of the following is a feature of a floating exchange rate system?
Government fixes the currency value
Exchange rates are determined by market forces
Currency value is pegged to gold
Central bank does not intervene in the forex market
Explanation - In a floating exchange rate system, the value of a currency is determined by supply and demand in the foreign exchange market, although central banks may occasionally intervene.
Correct answer is: Exchange rates are determined by market forces
Q.3 Which institution is primarily responsible for regulating the foreign exchange market in India?
Securities and Exchange Board of India (SEBI)
Reserve Bank of India (RBI)
Finance Ministry
World Bank
Explanation - The RBI regulates and manages the foreign exchange market in India, controlling currency flows and maintaining stability in exchange rates.
Correct answer is: Reserve Bank of India (RBI)
Q.4 Which type of exchange rate system fixes the value of a currency relative to another currency?
Floating exchange rate
Pegged exchange rate
Managed float
Free market exchange rate
Explanation - In a pegged or fixed exchange rate system, the government or central bank fixes the value of the currency against another major currency, like the US dollar.
Correct answer is: Pegged exchange rate
Q.5 What is a spot transaction in the foreign exchange market?
Buying and selling currency for immediate delivery
Trading currency to be delivered in the future
Buying government bonds
Speculating on stock prices
Explanation - A spot transaction involves the exchange of currencies at the current market rate, with delivery usually occurring within two business days.
Correct answer is: Buying and selling currency for immediate delivery
Q.6 What does the term 'exchange rate' refer to?
The price of one currency in terms of another
The interest rate set by a central bank
The rate of inflation in a country
The stock market index value
Explanation - The exchange rate indicates how much one unit of a currency can be exchanged for units of another currency.
Correct answer is: The price of one currency in terms of another
Q.7 Which of the following affects exchange rates under a floating system?
Supply and demand for currencies
Government regulations alone
Gold reserves only
Stock market performance only
Explanation - In a floating exchange rate system, currency values fluctuate based on market demand and supply, influenced by trade, investment, and speculation.
Correct answer is: Supply and demand for currencies
Q.8 Which type of exchange rate system allows the currency value to fluctuate within a specified range?
Free float
Managed float
Fixed rate
Gold standard
Explanation - In a managed float system, exchange rates are primarily determined by market forces but the central bank may intervene to prevent excessive volatility.
Correct answer is: Managed float
Q.9 Which of the following is NOT a function of the foreign exchange market?
Facilitating international trade
Providing hedging opportunities
Generating domestic fiscal policy
Speculating on currency movements
Explanation - The foreign exchange market primarily deals with currency exchange and risk management; fiscal policy is determined by the government through taxation and spending.
Correct answer is: Generating domestic fiscal policy
Q.10 What is a forward contract in forex trading?
Exchange of currency immediately at spot rate
Agreement to buy or sell currency at a future date at a predetermined rate
Buying shares of foreign companies
Speculative currency trade without delivery
Explanation - A forward contract allows parties to lock in an exchange rate today for a currency transaction that will occur at a future date, reducing exchange rate risk.
Correct answer is: Agreement to buy or sell currency at a future date at a predetermined rate
Q.11 Which of the following is a major participant in the foreign exchange market?
Commercial banks
Local grocery stores
Insurance companies only
Municipal governments
Explanation - Commercial banks are primary participants in the forex market, providing currency conversion, liquidity, and market-making services.
Correct answer is: Commercial banks
Q.12 Which of the following best defines the term 'currency appreciation'?
A decrease in the value of a currency
An increase in the value of a currency relative to another
The fixing of a currency to gold
The central bank printing more currency
Explanation - Currency appreciation occurs when the market value of a currency rises relative to other currencies.
Correct answer is: An increase in the value of a currency relative to another
Q.13 Which exchange rate system was commonly used under the Bretton Woods Agreement?
Floating exchange rate
Fixed exchange rate pegged to the US dollar
Managed float
Free-market currency
Explanation - Under Bretton Woods, countries fixed their currencies to the US dollar, which was convertible to gold.
Correct answer is: Fixed exchange rate pegged to the US dollar
Q.14 What role does speculation play in the foreign exchange market?
Speculators aim to profit from currency fluctuations
Speculators fix the exchange rate
Speculators eliminate currency demand
Speculators prevent international trade
Explanation - Speculators buy and sell currencies to profit from changes in exchange rates, adding liquidity to the market but also sometimes increasing volatility.
Correct answer is: Speculators aim to profit from currency fluctuations
Q.15 Which of the following is a characteristic of a spot exchange rate?
It applies to immediate currency transactions
It is fixed by the government
It only applies to forward contracts
It is determined by gold reserves
Explanation - The spot rate is the current exchange rate used for transactions that settle immediately, usually within two business days.
Correct answer is: It applies to immediate currency transactions
Q.16 Which of the following is true about a pegged exchange rate?
It allows complete free market determination of currency
It is fixed relative to another major currency
It is highly volatile with no government intervention
It fluctuates daily with supply and demand only
Explanation - A pegged exchange rate is set by the government or central bank relative to a major currency like the US dollar, providing stability in trade and investment.
Correct answer is: It is fixed relative to another major currency
Q.17 Which of the following is the most liquid forex market instrument?
Spot transactions
Forward contracts
Currency options
Futures contracts
Explanation - Spot transactions are the most liquid as they involve immediate currency exchange, whereas derivatives like forwards and options involve future settlement.
Correct answer is: Spot transactions
Q.18 Which factor can cause depreciation of a currency in a floating exchange rate system?
Trade deficit
Increase in exports
Higher foreign investment inflows
Government intervention to strengthen the currency
Explanation - A trade deficit increases demand for foreign currency and reduces demand for the domestic currency, leading to depreciation under a floating system.
Correct answer is: Trade deficit
Q.19 Which of the following is NOT a type of exchange rate system?
Floating
Pegged
Managed float
Fixed tax system
Explanation - Floating, pegged, and managed float are types of exchange rate systems, whereas a fixed tax system relates to taxation, not currency valuation.
Correct answer is: Fixed tax system
Q.20 Which type of forex market transaction is used to hedge against future currency risk?
Spot transaction
Forward contract
Cash purchase
Stock investment
Explanation - Forward contracts allow businesses to lock in an exchange rate for future transactions, reducing uncertainty and currency risk.
Correct answer is: Forward contract
Q.21 Which currency is most widely used as a reserve currency globally?
Euro
US Dollar
Japanese Yen
Indian Rupee
Explanation - The US Dollar is the dominant reserve currency used in global trade and finance, and many countries peg their currencies to it.
Correct answer is: US Dollar
Q.22 Which of the following occurs under a managed floating exchange rate system?
Central bank intervenes to prevent excessive fluctuations
Currency value is strictly fixed
Market forces have no role
Currency is pegged to gold only
Explanation - A managed float allows the exchange rate to fluctuate, but the central bank may intervene occasionally to stabilize the currency.
Correct answer is: Central bank intervenes to prevent excessive fluctuations
Q.23 What is the effect of high domestic inflation on a country's currency under a floating system?
Currency appreciates
Currency depreciates
Currency remains constant
Government fixes the currency automatically
Explanation - High inflation reduces a currency’s purchasing power, leading to depreciation in a floating exchange rate system.
Correct answer is: Currency depreciates
Q.24 Which of the following best describes a two-tier foreign exchange market?
Separate markets for commercial and government transactions
A market only for tourists
A market only for exports
A market with fixed gold-based rates
Explanation - A two-tier forex market separates official transactions (government/central bank) from commercial transactions, often seen in developing countries.
Correct answer is: Separate markets for commercial and government transactions