Module: | MODULE A: INTERNATIONAL BANKING
Q18: Evaluate the following statements regarding the structural nuances of foreign exchange arithmetic and base currency identification. Identify the correct combination.
Statement 1. In the interbank quotation where 1 Euro equals 1.10 US Dollars, the Euro functions as the base currency and the US Dollar functions as the variable or quote currency.
Statement 2. Under the direct quotation method utilized by the Reserve Bank of India, a numerical decrease in the US Dollar to Indian Rupee exchange rate figure indicates a depreciation of the Indian Rupee.
Statement 3. When calculating cross rates through a common third currency, the Chain Rule principle dictates equating the product of the left hand side variables to the product of the right hand side variables.
Statement 2. Under the direct quotation method utilized by the Reserve Bank of India, a numerical decrease in the US Dollar to Indian Rupee exchange rate figure indicates a depreciation of the Indian Rupee.
Statement 3. When calculating cross rates through a common third currency, the Chain Rule principle dictates equating the product of the left hand side variables to the product of the right hand side variables.
✅ Correct Answer: B
🎯 Quick Answer:
Option B isolates the true statements. Statement II misinterprets the outcome of a direct quote movement.Structural Breakdown: Statement I is correct.
The currency represented as a single unit, which is 1 Euro, is always the base currency.
The currency that expresses the value of that single unit, which is 1.10 US Dollars, is the variable currency.
Statement II is incorrect.
In a direct quote, like 1 US Dollar equals 83.00 Indian Rupees, the foreign currency is the base.
If the rate decreases to 82.00, it means you now need fewer Indian Rupees to buy one US Dollar.
Therefore, the Indian Rupee has strengthened or appreciated, not depreciated.
Statement III is correct.
The Chain Rule is a foundational mathematical shortcut used by dealers to derive an unknown exchange rate between two currencies by linking them through a series of known exchange rates against a common vehicle currency like the US Dollar.