Question

1.Discuss two factors that affects current account balance and two factors that affects capital (financial) account balance, clearly indicating the direction (positive or negative) of the impact.

2. Define forward contracts and list two problems with forward contracts

Answer 1

1. Two factors that affect current account balance are-

A.level of savings rate into the economy will affect the imports and export indirectly thanks affecting the trade deficit in the current account.

B. Currency exchange rate also affect current account deficit or surplus.

Two factors that affect capital account balance are-

A . Liberalisation of economy affect the capital account

B. Introduction of a new tax can also affect capital account.

2.forward contracts are customised contract between two parties who are directly related and it is not traded on the exchanges and it has to be executed on the maturity in the forward Market. It is used at the hedging in forward Market.

Two problems of forward contracts are-

A. They are not traded frequently

B. These are not a standardized.