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Comprehension:

Read the passage carefully and answer the questions based on the passage:

The Foreign Exchange Market

Let us assume that a single Indian resident wants to visit London on a vacation (an import of tourist services). She will have to pay in pounds for her stay there. She will need to know where to obtain the pounds and at what price, this price is known as the exchange rate. Foreign Exchange Rate (also called Forex Rate) is the price of one currency in terms of another. It links the currencies of different countries and enables comparison of international costs and prices. For example, if we have to pay Rs 50 for $1 then the exchange rate is Rs 50 per dollar. The market in which national currencies are traded for one another is known as the foreign exchange market. The major participants in the foreign exchange market are commercial banks, foreign exchange brokers and other authorised dealers and monetary authorities. It is important to note that although participants themselves may have their own trading centres , the market itself is world-wide. There is a close and continuous contact between the trading centres and the participants dealing in more than one market.

...... links the currencies of different countries and enables comparison of international costs and prices.

Solution

✅ Correct Option: 2

Option 1 -> Commercial banks facilitate currency transactions but do not link currencies for comparison.

Option 2 -> Foreign Exchange Rate directly links currencies and enables price comparison across countries.

Option 3 -> Foreign Exchange Market is the platform for trading currencies, not the linking mechanism itself.

Option 4 -> Monetary authorities regulate monetary policy but don't directly link currencies for comparison.


Hence, Foreign Exchange Rate -> The foreign exchange rate is the price of one currency expressed in terms of another currency. It acts as a conversion factor that links different currencies together, making it possible to compare costs, prices, and economic values across countries. For example, if 1 USD = 80 INR, we can easily compare the price of goods in the US with those in India. Without exchange rates, international price comparisons would be impossible. -> correct

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