CAIIB BFM MCQ – Top 600 Highly Expected Questions: 30 Questions & Answers

Statement I is correct. Nostro means Ours. For the State Bank of India, its US Dollar account held at Citibank in New York is its Nostro account, meaning Our money with you. Statement II is correct. Vostro means Yours. For the State Bank of India, the Indian Rupee account that Citibank maintains with them in Mumbai is a Vostro account, meaning Your money with us. Statement III is completely incorrect. Loro means Theirs. It does not relate to the central bank or sovereign debt. A Loro account is used when a third bank refers to an account held by one bank with another. For example, if Bank of Baroda refers to the account that State Bank of India holds with Citibank, Bank of Baroda calls it a Loro account, meaning Their account with them

1. Identify the requirement. The Indian importer needs to buy 1,00,000 Euros. Therefore, the Indian bank must sell Euros to the customer. 2. Determine the chain of transactions. Since the bank does not have Euros, it must first buy Euros from the international market using US Dollars, and then buy those US Dollars using Indian Rupees from the local market. 3. Select the rates using the Sell High principle. To sell Euros to the customer, the bank will charge the highest possible sequence of Ask rates. The bank buys Euros using US Dollars at the Euro to US Dollar Ask rate of 1.0820. This means 1 Euro costs 1.0820 US Dollars. The bank buys US Dollars using Indian Rupees at the US Dollar to Indian Rupee Ask rate of 83.10. This means 1 US Dollar costs 83.10 Indian Rupees. 4. Calculate the Cross Rate. Multiplying the two Ask rates gives the final Ask rate for Euro to Indian Rupee. Cross Rate equals 1.0820 multiplied by 83.10 equals 89.9142. This means 1 Euro costs 89.9142 Indian Rupees. 5. Final Calculation is 1,00,000 Euros multiplied by 89.9142 equals an exact outflow of 89,91,420 Indian Rupees. This is read as Eighty-Nine Lakhs, Ninety-One Thousand, Four Hundred and Twenty Rupees.

Statement I is correct. The Daylight limit or Intraday limit allows dealers to take larger temporary positions during the day when markets are highly liquid and they can quickly react to news. Statement II is incorrect. The Overnight limit is always significantly smaller, not larger, than the Daylight limit. When domestic markets close, international markets like New York or Tokyo continue trading. An adverse geopolitical event during the night could cause a massive gap in currency prices by the time the domestic market opens the next morning. Banks strictly minimize overnight open positions to mitigate this gap risk. Statement III is correct. An open position only exists when there is a mismatch between assets, meaning purchases, and liabilities, meaning sales, in a specific currency. Perfectly matching buys and sells creates a square position, neutralizing market risk.

1. Analyze the risk profile. The exporter is receiving Euros. Their risk is that the Euro value falls, meaning it depreciates. They need the right to sell Euros at a guaranteed minimum price. 2. Evaluate Option A, which is a Forward Contract. A forward contract is a binding obligation. If the Euro appreciates, the exporter is legally forced to sell at the lower contracted rate, losing the upside profit. This fails the scenario objective. 3. Evaluate Option B, which is a Put Option. A Put option gives the buyer the right to sell the underlying asset. By purchasing a Put option, the exporter locks in a floor price. If the Euro crashes, they exercise the option and sell at the guaranteed high strike price. If the Euro skyrockets, they let the option expire worthless and sell their Euros in the open market at the new, highly profitable spot rate. This perfectly matches the objective. 4. Evaluate Option C, which is a Call Option. A Call option gives the right to buy. The exporter already has Euros coming, so they do not need to buy more

Statement I is correct. The Telegraphic Transfer Buying Rate is the most favorable buying rate for the customer. It is used for clean inward wire transfers where the money is already sitting in the bank overseas Nostro account. The bank faces no interest loss. Statement II is correct. The Bill Buying Rate is used when the bank buys an export document. The bank pays the exporter Rupees today, but will not receive the foreign currency until the bill travels abroad and the foreign buyer pays, which creates a transit period. Statement III is incorrect. Because the bank has to wait to receive funds in a Bill Buying scenario, it deducts a much larger margin to cover the interest loss for the transit period. Therefore, the Telegraphic Transfer Buying Rate, which has no transit delay, always yields a higher final Rupee amount for the exporter than the Bill Buying Rate.