Module: | MODULE A: INTERNATIONAL BANKING
Q6: Consider the following statements detailing the quotation methods and regulatory guidelines in the Indian foreign exchange market. Identify the correct combination.
Statement 1. Under the direct method of quotation, a fixed unit of the foreign currency is expressed in terms of variable units of the domestic currency.
Statement 2. The Foreign Exchange Dealers Association of India is a self-regulatory body that formulates operational guidelines for authorized dealers, including rules regarding merchant transactions and standard exchange margins.
Statement 3. When an authorized dealer bank quotes a two-way price to a customer, the Bid rate always represents the higher price at which the bank is willing to sell the foreign currency to the customer.
Statement 2. The Foreign Exchange Dealers Association of India is a self-regulatory body that formulates operational guidelines for authorized dealers, including rules regarding merchant transactions and standard exchange margins.
Statement 3. When an authorized dealer bank quotes a two-way price to a customer, the Bid rate always represents the higher price at which the bank is willing to sell the foreign currency to the customer.
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because the definition of the Bid rate in Statement III is reversed.Since August 1993, India has followed the direct quotation system for major currencies.
Structural Breakdown: Statement I is correct.
A direct quote keeps the foreign currency fixed and the domestic currency variable.
Example is 1 US Dollar equals 83.10 Indian Rupees.
Here, US Dollar is the fixed unit of 1, and Indian Rupee is the variable unit.
Statement II is correct.
The Foreign Exchange Dealers Association of India works in consultation with the Reserve Bank of India to create the granular rules for calculating rates, rounding off decimals, and applying mandatory margins on merchant trade.
Statement III is incorrect.
In any two-way quote, the bank always operates on the principle of Buy Low, Sell High.
The Bid rate is the lower rate at which the bank buys the foreign currency.
The Ask or Offer rate is the higher rate at which the bank sells the foreign currency.