1️⃣ Introduction to Forex
Definition:
Foreign Exchange (Forex) = Trading one currency for another to support global trade, investment, and remittances.
Forex Market Highlights:
- World’s largest financial market 🌎
- 24×5 trading
- Covers Spot, Forward, and Derivative transactions.
Mnemonic:
FOREX = FOreign REmittance Xchange
2️⃣ Structure of Forex Market
| Market | What It Does | Use |
|---|---|---|
| Spot Market | Immediate currency delivery | Quick settlements |
| Forward Market | Lock-in future exchange rates | Hedging risk |
| Swap | Exchange for a specific period | Short-term financing |
Tip: Remember S-F-S → Spot, Forward, Swap.
3️⃣ Authorized Dealers (ADs) & FFMCs
| Category | Who are they? | Role |
|---|---|---|
| AD-I | Commercial banks, co-op banks | Full forex services |
| AD-II | Upgraded FFMCs, co-op banks | Limited forex deals |
| AD-III | EXIM Bank, SIDBI, etc. | Specific forex services |
| FFMCs | Money changers | Buy/sell forex for travelers |
Mnemonic: I → Full, II → Limited, III → Specialized
4️⃣ Types of Forex Transactions
| Type | Examples |
|---|---|
| Current Account | Imports/exports, travel, education, remittances (under LRS – $2,50,000/year) |
| Capital Account | FDI, FPI, ODI (investments & overseas business expansion) |
Key Rule:
- Current Account → Free unless restricted
- Capital Account → Restricted unless permitted
5️⃣ RBI’s Role in Forex
- Governs through FEMA (1999)
- Ensures legal, transparent transactions
- Manages Forex Reserves 💰
- Intervenes to stabilize INR under Managed Float System.
Mnemonic: RBI = Regulate, Balance, Intervene
6️⃣ Exchange Rate Basics
| Term | Meaning |
|---|---|
| Spot Rate | Current rate for immediate settlement |
| Forward Rate | Pre-decided rate for future exchange |
| Managed Float | Market decides rates, RBI intervenes for stability |
Example: If 1 USD = ₹89 today → Spot Rate. If booked for next month → Forward Rate.
7️⃣ Hedging & Risk Management
| Tool | Use |
|---|---|
| Forward Contracts | Lock rate for future |
| Currency Swaps | Exchange currencies temporarily |
| Options/Futures | Flexible hedging against volatility |
Mnemonic: HFO = Hedge, Forward, Options
8️⃣ Forex Products
- Derivatives: Futures, options, swaps
- Foreign Currency Loans: Trade financing
- Retail Products: Forex cards, wire transfers, foreign currency accounts.
9️⃣ Forex Trading Platforms
- Bank Platforms: e.g., Baroda Insta SmartTrade
- Features: Real-time rates, online orders, risk management tools
- Retail Services: Travel cards, international remittances.
🔟 Compliance & Documentation
| Requirement | Purpose |
|---|---|
| Form A2 | Mandatory for remittances |
| KYC | Identity verification |
| Record-Keeping | For FEMA & RBI audit compliance |
1️⃣1️⃣ RBI’s Forex Reserves Management
- Purpose:
- Cushion against global shocks
- Maintain rupee stability
- Ensure import cover (~8–10 months ideally)
- Usage:
- Market interventions
- External trade support
- Managing domestic liquidity.
1️⃣2️⃣ Cross-Border Transactions
- Regulated by: RBI & FEMA
- For Exporters & Importers:
- Timely repatriation of export proceeds
- Documentation for compliance and taxation.
1️⃣3️⃣ Forex in International Trade
- Trade Finance: Letters of credit, buyer’s credit, supplier’s credit.
- Forex Reserves: Enable seamless global trade without external borrowing.
1️⃣4️⃣ Global Trends & Policies
| Trend | Impact |
|---|---|
| Rise of CBDCs | Digital currency integration |
| De-dollarization | More trade in local currencies |
| Volatility | Need for advanced hedging tools |
Policy Highlight:
- LRS: $2,50,000 per FY for education, travel, investments, etc.
- BOP Management: Focus on controlling deficits and improving reserves.
1️⃣5️⃣ Challenges in Forex
| Challenge | Impact |
|---|---|
| Volatility | Exporter/importer losses |
| Global Inflation | Currency depreciation |
| Compliance Issues | Penalties, operational risks |
Quick Mnemonics for Exams
Hedging Tools: HFO = Hedge, Forward, Options
Market Types: SFS → Spot, Forward, Swap
RBI Role: RBI = Regulate, Balance, Intervene
Transactions: Current = Free; Capital = Controlled
MCQ
Here is a set of multiple-choice questions (MCQs) that comprehensively cover the topics in the provided “Foreign Exchange” PDF:
1. Exchange Earner’s Foreign Currency Account (EEFC Account)
Q1. Which of the following is prohibited for EEFC accounts?
A) Receiving funds from export transactions.
B) Holding balances beyond two months without conversion.
C) Marking a lien except in case of a statutory order.
D) Opening multiple EEFC accounts in the same branch.
Answer: C
Q2. What is the mandatory action for balances held in EEFC accounts after two calendar months?
A) They must be retained in the EEFC account.
B) They should be mandatorily converted into INR.
C) Balances must be transferred to a different foreign account.
D) The account must be closed.
Answer: B
2. Letter of Credit (LC) and Bank Guarantee (BG)
Q3. Under BASEL norms, margin money for LCs/BGs should be earmarked under which scheme code?
A) TD 123/124
B) TD 126/127
C) GL 13510/13515
D) GL 14804/14809
Answer: B
Q4. What is the maximum maturity period of a bank guarantee under normal circumstances?
A) 10 years
B) 5 years
C) 15 years
D) No limit
Answer: A
3. Trade Transactions and FEMA Guidelines
Q5. Payments for imports from Nepal must generally be made in:
A) Foreign currencies
B) Indian Rupees (INR)
C) Any major global currency
D) Gold equivalent values
Answer: B
Q6. Which of the following is TRUE under FEMA (Manner of Receipt and Payment) Regulation?
A) ACU members can freely use any foreign currency for payments.
B) Transactions with Bhutan are restricted to USD only.
C) Payments for non-trade transactions may be made in INR or foreign currencies.
D) All trade receipts from ACU countries must be paid in INR exclusively.
Answer: C
4. Hedging and Derivatives
Q7. Which entity regulates the framework for hedging foreign exchange risks in India?
A) SEBI
B) IRDA
C) RBI
D) Ministry of Finance
Answer: C
Q8. Which of these derivative products is allowed for hedging foreign exchange risks in India?
A) Swap
B) Currency Futures
C) Forward Contract
D) All of the above
Answer: D
5. e-BRC (Bank Realization Certificate)
Q9. What is the primary advantage of the revamped e-BRC process for exporters?
A) Banks issue e-BRCs instantly upon lodgment.
B) Exporters can self-generate e-BRCs based on inward remittances.
C) e-BRC eliminates the need for linking shipping bills with transactions.
D) Exporters no longer require RBI acknowledgments.
Answer: B
Q10. The digital exchange of e-BRCs is facilitated between banks and which regulatory authorities?
A) RBI and DGFT
B) CBDT and GSTN
C) SEZs and RBI
D) All of the above
Answer: D
6. Precautions and Fraud Prevention in Forex
Q11. Which platform is recommended for issuing electronic bank guarantees (e-BGs)?
A) NSDL e-BG
B) NeSL e-BG
C) Baroda Insta BG
D) RBI BG portal
Answer: B
Q12. What should be done if a fake bank guarantee (BG) is identified by a branch?
A) Destroy it immediately.
B) Issue a confirmation to the beneficiary.
C) Report the incident to Fraud Risk Management.
D) Validate and process the guarantee as normal.
Answer: C
7. Miscellaneous Updates and Guidelines
Q13. Who are the empaneled agencies for obtaining credit opinion reports?
A) Only SEBI-regulated credit rating agencies
B) Dun & Bradstreet, Mira Inform, and Unified Credit Solutions
C) Banks only
D) Indian Corporate Registries
Answer: B
Q14. RBI guidelines on unauthorized forex transactions require banks to:
A) Allow forex trading by retail clients.
B) Enable forex trading through authorized platforms only.
C) Open multiple trading accounts for corporates.
D) Provide commission rebates on large forex deals.
Answer: B
8. Foreign Portfolio Investments (FPI)
Q15. FPIs are limited in their investments based on:
A) The company’s annual turnover.
B) RBI-assigned limits for the fiscal year.
C) Global regulatory guidelines only.
D) Regional considerations without RBI intervention.
Answer: B
1. EEFC (Exchange Earner’s Foreign Currency) Account
Q1. Which of the following are valid reasons for marking a lien on an EEFC account?
A) Credit facilities
B) Statutory or court orders
C) Fund transfers between accounts
D) Maintaining balances beyond two months
Answer: B
Q2. In merchanting trade transactions (MTT), EEFC account funds must be earmarked for:
A) Travel expenses
B) Import liability payments under MTT
C) Dividend payouts
D) Investments in mutual funds
Answer: B
2. Trade Transactions and FEMA (Foreign Exchange Management Act)
Q3. For trade with Nepal, payments in foreign currency are allowed when:
A) Both parties agree in advance.
B) Nepal Rastra Bank permits it.
C) The transaction exceeds $10,000.
D) The trade involves gold commodities.
Answer: B
Q4. Under FEMA, the payment mechanism for member countries of ACU (Asian Clearing Union), except Nepal and Bhutan, is:
A) USD only
B) ACU dollar or euro as per RBI guidelines
C) INR exclusively
D) Payment in kind
Answer: B
Q5. Which of the following is NOT an authorized transaction under FEMA regulations?
A) Hedging against gold price risk
B) Payments to foreign investors in INR
C) Trading derivatives on unauthorized exchanges
D) Payment for shipping services through ACU
Answer: C
3. Hedging and Derivatives
Q6. According to RBI guidelines, entities are permitted to hedge gold price risk in:
A) Authorized Indian exchanges only
B) Over-the-counter (OTC) derivatives in IFSC
C) Commodity platforms not regulated by SEBI
D) Derivative markets in any foreign country
Answer: B
Q7. Retail users of derivative products include:
A) Foreign Portfolio Investors
B) Small businesses hedging import risks
C) Large corporates trading commodity futures
D) Banks providing treasury services
Answer: B
Q8. Anticipated exposure in hedging refers to:
A) Fixed asset purchases in foreign currency
B) Risk arising from possible future transactions
C) Risk from current outstanding liabilities
D) Speculative currency positions
Answer: B
4. Letter of Credit (LC) and Bank Guarantee (BG)
Q9. What is the mandatory duration for reporting updates on LC/BG margins under the CBS system?
A) Monthly
B) Quarterly
C) Every 6 months
D) Weekly
Answer: A
Q10. When issuing a physical bank guarantee for a registered beneficiary, branches must:
A) Obtain SWIFT confirmation only.
B) Check validity on the BG issuance platform.
C) Use e-BGs exclusively to avoid risks.
D) Always involve fraud risk management.
Answer: B
Q11. Which of the following prevents the occurrence of fake bank guarantees as per guidelines?
A) Issuing serially numbered security forms
B) Mandating joint signatures for BGs above ₹50,000
C) Using platforms like NeSL e-BG
D) All of the above
Answer: D
5. Foreign Portfolio Investors (FPIs)
Q12. RBI has set the limits for FPIs in debt investments for the year 2024-25 as per:
A) FEMA Amendment 2024
B) RBI Master Directions on FPIs
C) SEBI International Investment Rules
D) Exchange control policies
Answer: B
Q13. FPIs investing in credit default swaps must adhere to:
A) Local investment limits set by SEBI
B) Global portfolio allocation rules
C) Guidelines issued under FEMA regulations
D) Both A and C
Answer: D
6. Electronic Bank Realization Certificate (e-BRC)
Q14. Exporters benefit from DGFT’s revamped e-BRC process as it enables them to:
A) Instantly lodge claims for GST refunds.
B) Self-certify inward remittances and generate e-BRCs.
C) Access real-time exchange rates for forex.
D) Obtain multiple BRCs for single shipments.
Answer: B
Q15. In the e-BRC process, exporters can use IRM proceeds to:
A) Offset non-compliant payments.
B) Replace outstanding Letters of Credit.
C) Link shipping bills with DGFT systems.
D) Repay export loans.
Answer: C
7. Unauthorized Forex Transactions
Q16. How can banks prevent unauthorized forex trading activities?
A) Issue guidelines for spot trading directly to individuals.
B) Allow clients to use unregistered forex platforms.
C) Publish a list of authorized entities and exchanges on public forums.
D) Encourage unmonitored external account setups for clients.
Answer: C
Q17. As per recent RBI notifications, banks are advised to:
A) Discontinue any dealings with FPIs.
B) Halt all foreign investment.
C) Monitor customer activity for unauthorized trading.
D) Maintain complete transparency in KYC while setting limits.
Answer: C
8. Miscellaneous Updates
Q18. Under the India-UAE CEPA, TRQ holders can remit advance payments for gold for a period of:
A) 3 days
B) 7 days
C) 11 days
D) 15 days
Answer: C
Q19. Revised RBI guidelines allow foreign currency accounts to be maintained outside India in cases of:
A) External Commercial Borrowings (ECBs)
B) Gold hedging transactions
C) Unauthorized fund flows
D) Misaligned hedging exposures
Answer: A
Q20. Standard documentation for issuing guarantees against counter guarantees includes:
A) Paper-based forms only
B) Execution through SWIFT/SFMS
C) Branch-led approval without central oversight
D) No specific documentation
Answer: B