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Examination Paper of Foreign Trade management
IIBM Institute of Business Management
Examination Paper MM.100
Indian Foreign Trade
Section A: Objective Type (30 Marks)
This section consists of Multiple Choice Questions and Short Questions
Answer all the questions
Part one carry 1 mark each and Part Two questions carry 5 marks each.
Part One:
Multiple choices:
1. Which of the following is NOT an initiative for attracting a higher Quantum of FDI?
a. Further Liberalization of Foreign Trade Policy
b. Rationalization of Labour Policy
c. Development of Infrastructure
d. Increase in Joint ventures
2. ECB stands for ______________________________
3. The textile and garment exports have been affected due to __________________
4. _____ is a popular export inductive scheme.
5. To overcome many of the problems associated with the advance licensing system this scheme
was introduced
a. Passbook Scheme
b. EPGC Scheme
c. Post Export Duty Exemption Scheme
d. Duty Drawback Scheme
6. Which of the following is a potential Export product
a. Automobile Products c. Agricultural Products
b. Leather Products d. Engineering Products
7. To give a special trust for export of computer software which of the following scheme was
developed
a. DEPB Scheme c. EOU/EPI Scheme
b. EPCG Scheme d. Duty Exemption scheme
8. It is a bilateral agreement between two countries to purchase specific amounts of each other’s
products over a specified period of time
a. Swap c. Clearing
IIBM Institute of Business Management 1
Examination Paper of Foreign Trade management
b. Switch d. Evidence Accounts
9. TRIPS stands for ____________________________
10. Foreign Investment Promotion Board does not consist which of the following member
a. Secretary Minister of External Affairs
b. Industry Secretary - Chairman
c. Foreign Investment Minister
d. Finance Secretary
Part Two:
1. Write a short note on ‘Globalization’?
2. Differentiate between Current Account Convertibility and Capital Account Convertibility?
3. Define ‘Deemed Exports’?
4. Discus the measures announced in the Union Budget 1990 – 00 for Trade Policy Reforms?
Section B: Caselets (40 Marks)
This section consists of Caselets
Answer all the questions
Each Caselet carries 20 marks each.
Detailed information should form the part of your answer (Word limit 150 to 200 Words)
Caselet 1
An American World Wide Corporation has decided to expand aggressively in Asia. It plans to source
much of its raw materials and subcontracting there and manufacture and market throughout Asia, from
Japan in the north to New Zealand in the South.
You were appointed to organize and direct this major new effort and one question was where to locate
the regional headquarters for the Asian Division (ADR). After considerable study, you selected the island
nation of Luau.
END OF SECTION A
Luau’s advantages are several. It is about equidistant between New Zealand and Japan. It was a British
Colony, so the main language is English. It has a relatively efficient telephone and telegraph system and
IIBM Institute of Business Management 2
Examination Paper of Foreign Trade management
good air service to all the major Asian destinations in which you are interested and to the United states,
as well.
Not least important, the Luau government is delighted to have your company locate and invest there. It
has made very attractive tax concessions to the company and to its personnel who will move there.
The company moves in, leases one large building and puts out invitations to bid on the construction of a
large building which will be its permanent headquarters. Now as you begin to work much more with the
private banking and business people of luau and less with government officials, you begin to be more
aware of luau characteristics about which you had not thought much previously. Almost all of the
middle and upper management personnel in the business and finance sector are of Chinese extraction.
The native population of luau, which is the majority, is a Micronesian race.
On enquiry why the Chinese are dominant in banking and business; while the Micronesians stay with
farming, fishing, government and manual labor, you are told that this is the way it developed
historically. The Chinese enjoy and are good at banking and business; while the native Luauans do not
like those activities and have stayed with their traditional pastimes. The two groups buy and sell from
and to each other, but there are almost no social relations and very little business or professional
overlap between the groups. Occasionally, some of the Micronesians study abroad and some work
abroad for periods; when they return they frequently go to work in a bank or business or take a
government position.
You must staff your headquarters with middle and lower management people and with clerical help.
You find that the only applicants for the jobs are Chinese, and you select the best available. They are
quite satisfactory, and the operation gets off to a good start.
Then as the months pass, you notice a gradual change of attitude towards you and the company among
the government officials and among the people in general. They have become less friendly, more
evasive, and less co-operative. You ask your Chinese staff about it, but they have noticed nothing
unusual.
Required
Q. Give some suggestions to improve the Government and Public Relations?
Caselet 2
Vertex, the tenth largest bank in the world has promoted world – class institutions in India. A few of
such institutions built by Vertex are National Stock Exchange, The National Securities Depository
Services Limited, Stock Holding Corporation of India etc. vertex is a strategic investor in a plethora of
institutions, which have revolutionized the Indian Financial Markets. Vertex promoted Vertex Bank to
make the formal foray of the Vertex group into commercial banking. The birth of Vertex Bank took place
after RBI issued guidelines to for the entry of new private sector banks in January 19, 1993.
Subsequently, Vertex as promoters sought permission to establish a commercial bank and retained
IIBM Institute of Business Management 3
Examination Paper of Foreign Trade management
KPMG a management consultant of international repute to prepare the groundwork for establishing a
commercial Bank.
Vertex successfully completed its public issue in February 1999, which led to its paid – up capital
expanding to Rs. 1400 million. The promoters holding consequent to this public issue stood reduced to
71% with Vertex holding 57% and SIDBI 14% of the paid –up capital of Vertex Bank. This was in line with
the requirement of RBI which stipulated that eventually the promoters holding should be bought down
to 40%. Banking as a whole was undergoing a change in India. With the retail – banking sector expected
to grow at a rate of 30%, players were focusing more and more on the retail sector.
In 2000, there was a corporate shift in the emphasis of Vertex bank from corporate banking to retail
Banking. This shift was mainly initiated due to the change in the top management at corporate office
and also due to a paradigm shift in the global banking industry from corporate banking to retail Banking.
The bank felt the need to provide its retail clients with complete banking solutions under one roof top
penetrate the retail sector. In line with the change in emphasis, Vertex Bank decided to divide the
functions of Rajendra Pillai who was earlier looking after both corporate and retail services, by
appointing a young and dynamic management graduate Sanjay Singh to head the retail banking
segment. The following were some of the measures adopted by the bank for promoting its retail
products.
Product: The bank introduced a wide array of retail banking products in order to penetrate the retail –
banking segment. Earlier, the bank had concentrated on big retail clients. Only clients having a minimum
balance of Rs. 25,000 were allowed to open a savings account. However, the minimum balance
requirement was lowered to Rs. 5,000. The first category consisted of clients having an average
quarterly balance of Rs 5 lakh and above, and the second category consisted of customers having an
average quarterly balance of Rs. 25 lakh and above. These preferred customers were provided special
facilities like home delivery of demand drafts. The facilities were higher in the first category of clients.
State – of –the – art technology was used in the banking services by introducing ATMs, Internet banking,
demat services, International debit cards with multiple currency facility options available globally etc.
Direct Tax Payments: The Reserve Bank of India has authorized Vertex bank to conduct all government
transactions pertaining to the Central and State Government ministries and non – civil ministers e.g.
Indian Railways Income tax etc.
Investment Options: Bank helped clients to invest in government bonds, relief bonds, Suvidha bonds,
insurance policies etc.
ATMs: Vertex bank had set up 7 ATMs in Indore at prominent locations to facilitate better customer
service. The cost of availing an ATM card facility entailed an annual charge of Rs. 99. From their
inception, ATMs were being used merely as cash dispensing machines. Just four years back, people were
apprehensive of using ATMs for cheque/cash deposit. They feared the loss/ misuse of their
cheques/cash, if they deposited it in the ATMs.
Demat Account: The bank offer the demat account dealing in physical securities. The demat account
took care of all customers worries involved in portfolio management which was facilitated electronically.
Debit Cards: All the account holders of the bank were issued debit cards. These cards could be used
for ATM transactions and for payment of the purchase made at several retail outlets. The bank did not
provide any Credit Card facilities.
IIBM Institute of Business Management 4
Examination Paper of Foreign Trade management
World Currency Card: This card was exclusively designed for international travelers’ needs. From a
single card, customers can make payments/withdrawls in five foreign currencies.
Gift Cards: This card was issued to Vertex saving Account holders and had a minimum limit of Rs.
51,000. The card enabled clients to make payment at various gift stores throughout the country.
Home Loans: The bank offered home loans at a competitive interest rates for purchase, construction,
refinance, extension etc.
Phone Banking and Mobile Phone Banking: Banking services such as updated balance, details of last
five transactions, request for cheque book etc, were offered free of cost.
Internet Banking: All banking solutions were offered on the Vertex Website www.vertexbank.com. The
bank believed in providing anywhere anytime banking to its customers.
Promotion: The corporate office was promoting the retail products through nationwide ad campaigns.
These campaigns used billboards and hoardings mounted on kiosks. These campaigns were highly
innovative using animals for promoting major themes of customized services. The bank was, however,
not using any electronic media for advertising and used sales promotion for selling some of the products
like gift cards.
Initially, the branch was allowed a promotional budget of Rs. 2 – 3 lacs in order to establish itself in the
market.
Distribution: In order to support Sanjay Singh, a marketing team was appointed which consisted of two
young sales managers and 20 marketing executives who operated in the field. These marketing
representatives engaged in direct marketing included personal selling. The sales force was totally target
– oriented and various incentives were provided to the star performers.
HR Policies: In order to develop and motivate the sales force the bank had come up with key result
areas like budgets, star performance incentives etc. under this activity each employee’s performance
was appraised through a unique five – tier performance appraisal system. The employee was also given
a certificate of appreciation for his excellent performance. For creating a sense of belongingness, the
birthdays of employees were celebrated by flashing their name and birthday greetings on the Intranet.
The employee was also presented with a bouquet.
The bank had been able to increase its retail customers from 20,000 to 40,000 in Indore. The
contribution of retail services to the annual profits had increased from Rs. 73 Crores to Rs. 123 Crores
nationwide and from 1.50 Crores to 3.5 Crores for the Indore branch. Vertex bank as a whole had the
lowest Non Performing Assets (NPA) amongst private banks namely 0.2% and was known for its
efficiency. The Indore branch had established itself as number one private banks in terms of overall
profitability. In the present scenario, Sanjay Singh wondered whether the strategies adopted for
penetrating the retail market were sufficient to retain current customers and attract new ones. With
aggressive promotional strategies followed by other banks and the proposed entry of Citicorp, he
pondered on whether the current strategies would continue to be effective in the long run.
Questions
Q 1. Discuss the measures adopted by the bank for promoting its retail products?
Q2. Evaluate the impact of strategies on financial performance of the firm?
IIBM Institute of Business Management 5
Examination Paper of Foreign Trade management
Section C: Applied Theory (30 Marks)
This section consists of Long Questions
Answer all the questions
Each question carries 10 marks each.
Detailed information should form the part of your answer (Word limit 200 to 250 Words
1. What are the major features of EXIM policy 1992 - 97?
2. Discuss the elements of the Capital Account?
3. Describe the state’s role in Export Promotion?
END OF SECTION B
END OF SECTION C
IIBM Institute of Business Management 6
Examination Paper of Foreign Trade management
IIBM Institute of Business Management
Examination Paper MM.100
Foreign Exchange Management
Section A: Objective Type (30 Marks)
This section consists of Multiple Choice Questions and Short Questions
Answer all the questions
Part one carry 1 mark each and Part Two questions carry 5 marks each.
Part One:
Multiple choices:
1. It is established to help countries in reconstructing their economies in the post World War II?
a. International Monetary Fund
b. World Bank
c. International Finance Corporation
d. International Development Association
2. The exchange rates which is variable between currencies and determined by demand and supply
a. Floating Exchange Rate System c. Fixed Exchange Rate System
b. Free Float d. Managed float
3. The branches which do not maintain independent foreign currency accounts but have powers to
operate the accounts falls under
a. Category A c. Category B
b. Category C d. Category D
4. _____ quote is given by a bank to its retail customers
a. Merchant Quote c. Interbank Quote
b. American Quote d. European Quote
5. To take the base rate and add the appropriate margin to it is an
a. Spot TT Buying Rate c. Spot TT Selling Rate
b. Forward TT Buying Rate d. Forward TT Selling Rate
6. Which of the following is not an assumption to Law of One Price
a. Movement of Goods c. No Transaction Costs
b. No Tariffs d. Relative Form of PPP
7. The approach in which the value of a currency is determined by the relative demand and supply
of money and, the relative demand and supply of bonds is
IIBM Institute of Business Management 7
Examination Paper of Foreign Trade management
a. The Monetary Approach c. Exchange Rate Volatility Approach
c. The Asset Approach d. The Portfolio Balance Approach
8. Which of the following is the most important currency in the world after the collapse of Bretten
Woods
a. Yen c. US Dollar
b. Sterling d. DM
9. Option Forward is a
a. Forward Contract entered along with buying a call option.
b. Forward Contract entered along with writing a put option
c. Forward Contract entered by buying or selling at a future date.
d. Forward Contract entered by buying or selling over a period.
10. Hedging aims to
a. Increase Profits c. Reduce Costs
b. Maximize Profits d. Minimize Risk
Part Two:
1. Differentiate between Forward Rates and Expected Spot Rates?
2. Write a note on ‘Swaps’?
3. Differentiate between Bid Rate and Ask Rate?
4. Write a note on ‘Interest Rate Parity’?
Section B: Caselets (40 Marks)
This section consists of Caselets
Answer all the questions
Each Caselet carries 20 marks each.
Detailed information should form the part of your answer (Word limit 150 to 200 Words)
Caselet 1
END OF SECTION A
International asset swaps can be used to achieve international diversification without eroding the level
of foreign exchange reserves and weakening local market development. These asset swaps demand
limited foreign currency flows, which implies that there is a need for only net gains or losses to be
exchanged. Asset swaps protect foreign investors from market manipulation and expropriation risk and
have much lower transaction costs than outright investments. In spite of all this, asset swaps are
constrained by the attractiveness of local markets to foreign investors, and by various regulatory issues
covering counter-party risk, collateral considerations, accounting, valuation, and reporting rules.
IIBM Institute of Business Management 8
Examination Paper of Foreign Trade management
Institutional investors, especially pension funds and life insurance companies, are becoming the major
participants in the financial systems of many developing countries. In some cases like Egypt, Malaysia or
Sri Lanka, the sector is dominated by public agencies, but in several countries, including Argentina,
Brazil, Chile, Cyprus, Hungary, Mauritius and especially South Africa private institutions play a prominent
role in the accumulation of long-term financial resources. But in most developing countries, pension
funds and other institutional investors operate under strict limitations on their foreign investments,
mainly because of the shortage of foreign exchange reserves and the fear of capital flight.
The imposition of exchange controls on investment in foreign assets affects the financial performance of
pension funds and insurance companies. Exchange controls prevent an international diversification of
risk and a reduction in the exposure of contractual savings institutions to domestic currency and market
risk. Pension funds and other institutional investors in most developing countries are not generally
allowed to invest overseas. Even OECD countries, until the early 1980s, used to apply tight quantitative
restrictions on overseas investments by local institutions. The most common rationale for such
restrictions is to reduce the risk of capital ‘flight’, especially institutionalized capital flight. Another
rationale is to invest the locally mobilized long-term savings ‘at home’ to stimulate the development of
local capital markets and enhance employment opportunities for the same workers. Even in the absence
of legal limitations on foreign investing by local institutional investors, there are other significant
barriers—the most important are risk of expropriation by foreign governments and transaction costs.
These costs can be so large that they may offset any diversification benefits that would otherwise
accrue, especially when relatively low volumes of funds are involved. International diversification
improves the risk/return trade-off of investment portfolios by reducing the exposure to cyclical and
long-term structural shifts in local economic performance. In the US, where the large local economy is
highly diversified and where presence of global corporations provides an indirect avenue of
international diversification, overseas assets are less than 12% of total assets, although this represents a
significant increase over time. Removing exchange controls and fully integrating with international
capital markets should be the ultimate objective of policy in all developing countries. However,
complete removal of exchange controls is often constrained by the paucity of foreign exchange reserves
and the fear of stimulating capital flight, especially if confidence in future stability is low.
Asset swaps are clearly a second best option compared to the lifting of exchange controls. Developing
countries should consider authorizing their institutional investors to engage in international asset swaps.
But they should authorize to use properly designed swap contracts, preferably based on the basket of
liquid securities, permit only global investment banks to act as counter-parties, require use of global
custodians, properly monitor credit risk, maintain adequate collateral, and adopt market-to-market
valuation rules.
Questions
Q 1. How does the international asset swap mechanism work? Explain.
Q2. Discuss the various benefits of international asset swaps.
Caselet 2
The RBI held the view, for long, that strong exchange reserves need to be maintained, due to the bad
experience India had to go through in 1991. It has been a widely known policy of the RBI to keep
IIBM Institute of Business Management 9
Examination Paper of Foreign Trade management
accumulating dollar reserves, whenever there are strong inflows of foreign funds, which also ensures
that the rupee does not appreciate much. The policy has, over the years, resulted in the foreign
exchange reserves increasing to over $100 billion. However, this policy has also led to the RBI being
criticized for interfering in the foreign exchange markets too often.
Several justifications have been given for this policy. The first one, as mentioned in the opening
sentence, is the lack of confidence in the international architecture. That is, the liquidity support
available to a country when it suffers from Balance of Payments problems could be inadequate, not
available when needed urgently, or be set with political preconditions not acceptable to the country
facing the problems. The second reason is often the desire to contain the risks that may arise from
external shocks. External private capital often comes in when the country is doing well and exits at the
first indication of trouble. Having large reserves is essential to contain the panic conditions that prevail
in the markets in such situations. The third reason is the opportunity created by the current excessive
liquidity in the international financial markets and the associated low interest rates. If the interest rates
escalate later, capital may again reverse its direction, and flow to the markets in the developed
countries. Reserves accumulated at present will be helpful to withstand such shocks later. The final
reason, which is no less important, is that foreign currency reserves are required to withstand the
periodical volatility in the foreign exchange markets. The markets of emerging economies are less
efficient and cannot be depended upon to make automatic adjustments to correct the volatility in the
markets. Similarly, a politically sensitive event like the Pokhran blasts or skirmishes with Pakistan on the
border can cause a lot of Non-Resident Indians (NRIs) who are currently pumping money into the
country to withdraw it over night. Such swings in sentiment can play havoc with the exchange rates, and
the government will be called on to play a stabilizing role in such a situation.
The consistent accumulation of dollars has been often stopping the rupee from appreciating, though
there have been strong inflows of the dollar, on numerable counts in the past. The resultant liquidity
released into the system used to be sterilized by the RBI through issue of government securities. To an
extent, the inclination of the banks to invest in government securities beyond the statutory
requirements has come in handy for the RBI in achieving stability in the exchange rate of the rupee.
However, the situation changed from early last year (2003), when the rupee started appreciating against
the dollar. At the same time, the rupee has been depreciating against other major currencies like the
Euro and Yen, indicating that the appreciation is basically due to the weakness of the dollar against
these currencies. The RBI, this time, chose to allow some amount of appreciation of the rupee, against
dollar. The appreciation gained momentum due to inflows of dollars continuing, with the NRIs
encouraged by the gain of the rupee. Added to this, the prices of crude oil fell, easing the pressure on
the need for payments for oil imports. With the fear of losing out due to further improvement in the
rupee exchange rate, exporters also rushed to remit the dollars to India, pushing the exchange rate
further up. The sustained positive current account balance also appears to have had its impact in
generating positive sentiments for the rupee. It has been alleged, however, that most of the fund flows
to India are to gain from the arbitrage. Investors always prefer to invest in a currency that is
appreciating, so that they can gain from the interest and also from the appreciation if the currency.
However, this argument is refuted on several counts. The spread on the NRI deposits is capped at 2.5%
and is often not more than forward premium on the dollar in the Indian market. The investment by the
FIIs in debt funds is limited to $1 billion, all the FIIs put together. This cap prevents them from making
any meaningful arbitrage gains. The variability in interest rates in the two currencies involved, keeping in
view the narrow spreads, can add risk to the seemingly risk-less arbitrage. In view of these arguments, it
IIBM Institute of Business Management 10
Examination Paper of Foreign Trade management
can be said that the flow of dollars into India is driven by factors other than the strength of the rupee
and the resultant opportunities for arbitrage.
Questions
-
Q 1. What measures according to you the RBI should take to manage rupee-dollar exchange rates?
Q2. Do you think appreciation of rupee against dollar have any significant adverse impact on the Indian
economy? Discuss.
Section C: Applied Theory (30 Marks)
This section consists of Long Questions
Answer all the questions
Each question carries 15 marks each.
Detailed information should form the part of your answer (Word limit 200 to 250 Words
1. How many types of Exposures are there in terms of Exchange Risk?
2. Write a note on
International Monetary Fund
International Finance Corporation
International Development Association
END OF SECTION B
END OF SECTION C
IIBM Institute of Business Management 11
S-2-301012
WE
ARE PROVIDING CASE STUDY ANSWERS
ASSIGNMENT
SOLUTIONS, PROJECT REPORTS
AND
THESIS
ISBM / IIBMS / IIBM / ISMS / KSBM / NIPM
SMU / SYMBIOSIS / XAVIER / NIRM / PSBM
ISM / IGNOU / IICT / ISBS / LPU / ISM&RC
MBA - EMBA - BMS - GDM - MIS - MIB
DMS - DBM - PGDM - DBM - DBA
www.mbacasestudyanswers.com
ARAVIND 09901366442 -
09902787224
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