TFFE 99th Banking Professional Exam: Understanding Terminology

Distinguish between any four of the following

(a) Floating Exchange Rate and Crawling Peg Mid Rate (CPMR)

1. Under a Floating Exchange Rate, the exchange rate is determined by market demand and supply, whereas under CPMR, Bangladesh Bank sets a reference (mid) rate.
2. Under a Floating Exchange Rate, the central bank has little control over the exchange rate, whereas under CPMR, the central bank adjusts the mid-rate gradually.
3. Under a Floating Exchange Rate, the exchange rate changes freely, whereas under CPMR, banks buy and sell around the prescribed mid-rate.
4. A Floating Exchange Rate is a fully market-based system, whereas CPMR is a managed exchange rate system.
5. Bangladesh currently follows the CPMR system, whereas countries with fully market-determined exchange rates follow a Floating Exchange Rate.

(b) Direct Quotation and Indirect Quotation

1. Under Direct Quotation, one unit of foreign currency is expressed in domestic currency, whereas under Indirect Quotation, one unit of domestic currency is expressed in foreign currency.
2. In Direct Quotation, foreign currency is the base currency, whereas in Indirect Quotation, domestic currency is the base currency.
3. Example of Direct Quotation: USD 1 = BDT 110; Example of Indirect Quotation: BDT 1 = USD 0.0091.
4. Under Direct Quotation, the rule is “Buy Low, Sell High”, whereas under Indirect Quotation, the rule is “Buy High, Sell Low”.
5. Bangladesh normally follows Direct Quotation, whereas Indirect Quotation is used in some other countries.

(c) Current Account and Capital Account

1. Current Account records trade in goods, services, income and transfers, whereas Capital Account records capital transfers and non-produced non-financial assets.
2. Current Account records regular economic transactions, whereas Capital Account records one-time capital transactions.
3. Current Account includes exports, imports and remittances, whereas Capital Account includes debt forgiveness and transfer of fixed assets.
4. Current Account is the major component of the Balance of Payments, whereas Capital Account is comparatively a smaller component.
5. Current Account reflects current economic activities, whereas Capital Account reflects changes in capital ownership.

(d) Revolving LC and Transferable LC

1. A Revolving LC is automatically reinstated after utilization, whereas a Transferable LC can be transferred to another beneficiary.
2. A Revolving LC is used for repeated shipments, whereas a Transferable LC is used in middleman transactions.
3. In a Revolving LC, the same beneficiary continues to use the credit, whereas in a Transferable LC, the benefit is transferred to another beneficiary.
4. A Revolving LC reduces the need to open a new LC for every shipment, whereas a Transferable LC enables the original beneficiary to transfer the credit.
5. A Revolving LC is suitable for regular business transactions, whereas a Transferable LC is suitable when suppliers differ from the original beneficiary.

(e) Cash in Advance and Open Account

1. Under Cash in Advance, the buyer pays before shipment, whereas under Open Account, the buyer pays after receiving the goods.
2. Cash in Advance is the safest payment method for the exporter, whereas Open Account is the riskiest.
3. Cash in Advance places the payment risk on the buyer, whereas Open Account places the payment risk on the exporter.
4. Cash in Advance gives better protection to the exporter, whereas Open Account provides greater convenience to the buyer.
5. Cash in Advance is generally used where the buyer’s credit is uncertain, whereas Open Account is commonly used between trusted trading partners.

(f) Commercial Invoice and Proforma Invoice

1. A Commercial Invoice is issued after or at the time of shipment, whereas a Proforma Invoice is issued before the sales contract is finalized.
2. A Commercial Invoice is the final sales document, whereas a Proforma Invoice is a preliminary quotation.
3. A Commercial Invoice is used to claim payment, whereas a Proforma Invoice is used to arrange financing or open an LC.
4. A Commercial Invoice contains the actual details of the goods supplied, whereas a Proforma Invoice contains the expected price and terms.
5. A Commercial Invoice has final commercial value, whereas a Proforma Invoice has no final accounting or legal value.