TFFE 5th Banking Professional Exam: Understanding Treminology

Distinguish between any four of the following

(a) Nominal Exchange Rate and Real Exchange Rate

(1) Nominal Exchange Rate is the quoted price of one currency in terms of another, whereas Real Exchange Rate adjusts the nominal rate for the relative price levels of the two countries.

(2) Nominal Exchange Rate shows the actual market rate, whereas Real Exchange Rate shows the purchasing-power-based value of one currency against another.

(3) Nominal Exchange Rate does not directly consider inflation, whereas Real Exchange Rate takes the relative inflation or price levels into account.

(4) Nominal Exchange Rate is useful for actual currency transactions, whereas Real Exchange Rate is more useful for measuring the international competitiveness of a country’s goods.

(b) Bill of Entry and Bill of Export

(1) Bill of Entry is submitted by an importer for imported goods, whereas Bill of Export is submitted by an exporter for goods being exported.

(2) Bill of Entry is used by Customs to assess import duty and clear the goods, whereas Bill of Export is used by Customs to process and allow the export shipment.

(3) Bill of Entry provides evidence that imported goods have arrived in the country, whereas Bill of Export provides evidence that goods have been exported from the country.

(4) Bill of Entry is mainly related to import transactions, whereas Bill of Export is mainly related to export transactions.

 (c) Crawling Peg and Floating Exchange Rate

1. Crawling Peg allows the exchange rate to move gradually around a central reference rate, whereas Floating Exchange Rate is mainly determined by market demand and supply.
2. Under a Crawling Peg, the central bank has a role in adjusting or managing the exchange rate, whereas under a Floating Exchange Rate, the central bank generally does not defend a specific exchange rate.
3. Crawling Peg provides more exchange rate stability, whereas Floating Exchange Rate allows greater flexibility in response to market forces.
4. Bangladesh Bank introduced the Crawling Peg Mid-Rate system in May 2024 as an interim step towards a fully floating exchange rate system.

(d) Currency Appreciation and Currency Depreciation

1. Currency Appreciation means a currency becomes stronger, whereas Currency Depreciation means a currency becomes weaker.
2. Appreciation means fewer units of local currency are required to buy a foreign currency, whereas depreciation means more units of local currency are required.
3. Appreciation makes imports cheaper, whereas Depreciation makes imports more expensive.
4. Appreciation can make exports less competitive, whereas Depreciation can make exports more competitive.

(e) Forward Exchange Rate and Spot Exchange Rate

1. Spot Exchange Rate is the rate for immediate exchange of currencies, whereas Forward Exchange Rate is the rate agreed today for exchange at a specified future date.
2. Under a Spot Transaction, settlement normally takes place within two working days, whereas a Forward Transaction is settled on the agreed future date.
3. Spot Rate is mainly used for transactions requiring immediate currency settlement, whereas Forward Rate is mainly used for future foreign currency payments or receipts.
4. Forward Rate can be used to protect against exchange rate fluctuations, whereas Spot Rate does not provide such future exchange rate protection.

(f) FOB and CIF

1. Under FOB (Free On Board), the seller delivers the goods on board the vessel and the buyer arranges the main carriage, whereas under CIF (Cost, Insurance and Freight), the seller arranges and pays for the freight to the named destination port.
2. Under both FOB and CIF, risk transfers from the seller to the buyer when the goods are loaded on board the vessel at the port of shipment.
3. Under FOB, the buyer arranges marine insurance, whereas under CIF, the seller must arrange marine insurance for the buyer.
4. Under FOB, the buyer bears the main carriage and insurance costs after shipment, whereas under CIF, the seller bears the freight and insurance costs up to the named destination port.