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International Finance
April 2025 Examination
1. When the International Monetary
Fund (IMF) conducts a comprehensive analysis of a specific economy, why does
the Balance of Payments (BOP) often emerge as a crucial component? How does the
paradigm shift when viewed from the perspective of the Current Account, and
what role does the Capital Account play in this context? Explain the
significance of these accounts in understanding the overall economic health and
stability of the country. (10
Marks)
Ans 1.
Introduction
The
Balance of Payments (BOP) serves as a comprehensive record of all economic
transactions between a country and the rest of the world over a specific
period. It plays a pivotal role in assessing the economic health of a nation
and is particularly significant in the analytical framework of the
International Monetary Fund (IMF). By dissecting the BOP into its
components—namely, the Current Account and the Capital Account—economists can
evaluate a country’s trade dynamics, investment inflows, and overall financial
stability. The BOP's importance is magnified when global economic conditions
become volatile, as it reflects the interplay of external factors affecting
domestic economic resilience. Understanding the components of
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2. In the context of international
finance, how does the concept of Interest Rate Parity (IRP) influence the
exchange rates between two currencies? What are the key mechanisms through
which IRP affects the economic interactions and financial stability of two
interconnected economies? How does this parity help in maintaining equilibrium
in foreign exchange markets? Explain the implications of IRP on the exchange
rate dynamics between these economies.
(10 Marks)
Ans 2.
Introduction
Interest Rate Parity (IRP)
is a fundamental concept in international finance that explains the
relationship between interest rates and exchange rates of two countries. It
establishes a theoretical framework where the difference in interest rates
between two nations is equal to the difference between the forward and spot
exchange rates. This parity ensures there is no arbitrage opportunity in the
foreign exchange market. IRP is critical in maintaining equilibrium in currency
markets, influencing international investments, and promoting financial
stability. The principle highlights how changes in interest rates can lead to
adjustments in exchange rates, reflecting economic fundamentals. Understanding
IRP is essential for policymakers, investors,
3a. In the realm of international
trade, what significance does an Export Earners' Foreign Currency (EEFC)
account hold for global traders? How does the existence of an EEFC account
facilitate the retention of foreign exchange earnings without converting them
into the domestic currency? What are the key benefits and implications of this
account for exporters in managing their
foreign exchange reserves? Explain the
role of EEFC accounts in enhancing trade efficiency and financial
flexibility. (5 Marks)
Ans
3a.
Introduction
An
Export Earners’ Foreign Currency (EEFC) account is a special bank account that
allows exporters to retain their foreign exchange earnings without the need to
immediately convert them into domestic currency. These accounts are particularly
significant in the realm of international trade, as they provide exporters with
the flexibility to manage their foreign exchange reserves efficiently. By
mitigating the need for repeated currency conversions, EEFC accounts help
reduce transaction costs and exchange rate risks, making them a valuable tool
for global
b. In the context of foreign
exchange management, how does Translation Risk emerge as a critical component
of forex risks? What are the underlying factors that contribute to Translation
Risk, and how does it impact financial statements and asset values? How do
fluctuations in exchange rates exacerbate this risk for multinational
corporations? Explain the significance of Translation Risk in the broader
spectrum of forex risk management. (5
Marks)
Ans 3b.
Introduction
Translation
Risk, also known as accounting exposure, arises when the financial statements
of multinational corporations are consolidated, and the value of foreign
currency-denominated assets and liabilities is converted into the reporting
currency. This risk is critical as exchange rate fluctuations can significantly
impact the reported financial performance and net worth of a business.
Translation Risk is a major component of forex risk management and demands
strategic mitigation to
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