Foreign Exchange Interview Questions

Ever faced an HR interview before? In case you haven’t, I am sure that you might face one soon enough. If you are looking to built a career in Foreign Exchange, you will find these Interview questions helpful for your next Interview.

Q.1 What is Foreign Exchange Market?

Foreign Exchange Market is a place where foreign currencies of different countries are bought and sold. It is not a physical market, but a network of computers connected to each other. It is called OTP or Over the counter market. Euro and USD are the most commonly traded currencies in the world.

Q.2 Which is the most traded currency pairs?
Since every trade involves selling one currency for another. Therefore the most traded ‘currency pairs’ are USD/GBP USD/EUR  USD/JPY.
Q.3 What do you understand by a cable in Forex?
USD/GBP rate is also referred as ‘Cable’ that is a client would say “Give me a price in 10 Million Cable”.
Q.4 What is the average daily volumes in foreign exchange
The average daily volumes in the foreign exchange market are USD 5 Trillion.
Q.5 How does trade occur in forex market?
Trades occurs over the phone or through electronic trading platforms (software).The most well known are FX trades are, Thomson Reuters Matching, EBS (Electronic Broking Services), Currenex, HotSpot FX.
Q.6 What are spot trades?
The most trades are ‘Spot’ trades with exchange of payments (settlement) taking place two days after trade date.
Q.7 What are Forwards?
Trades that are agreed today and settle in the future like 1, 2 or 6 months time are referred as ‘Forwards’ that is.”Give me a price in USD/JPY for 4 months settlement”.
Q.8 When does a country's currency strengthens?
When any country is enjoying strong economic growth their currency also strengthens.
Q.9 What is the complete definition for Foreign Exchange?
The foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.
Q.10 Which is the most traded currency pairs?
Since every trade involves selling one currency for another. Therefore the most traded ‘currency pairs’ are USD/GBP USD/EUR  USD/JPY.
Q.11 What do you understand by a cable in Forex?
USD/GBP rate is also referred as ‘Cable’ that is a client would say “Give me a price in 10 Million Cable”.
Q.12 What is the average daily volumes in foreign exchange
The average daily volumes in the foreign exchange market are USD 5 Trillion.
Q.13 How does trade occur in forex market?
Trades occurs over the phone or through electronic trading platforms (software).The most well known are FX trades are, Thomson Reuters Matching, EBS (Electronic Broking Services), Currenex, HotSpot FX.
Q.14 What are spot trades?
The most trades are ‘Spot’ trades with exchange of payments (settlement) taking place two days after trade date.
Q.15 What are Forwards?
Trades that are agreed today and settle in the future like 1, 2 or 6 months time are referred as ‘Forwards’ that is.”Give me a price in USD/JPY for 4 months settlement”.
Q.16 When does a country's currency strengthens?
When any country is enjoying strong economic growth their currency also strengthens.
Q.17 What is the complete definition for Foreign Exchange?
The foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.
Q.18 Which is the most traded currency pairs?
Since every trade involves selling one currency for another. Therefore the most traded ‘currency pairs’ are USD/GBP USD/EUR  USD/JPY.
Q.19 What do you understand by a cable in Forex?
USD/GBP rate is also referred as ‘Cable’ that is a client would say “Give me a price in 10 Million Cable”.
Q.20 What is the average daily volumes in foreign exchange
The average daily volumes in the foreign exchange market are USD 5 Trillion.
Q.21 How does trade occur in forex market?
Trades occurs over the phone or through electronic trading platforms (software).The most well known are FX trades are, Thomson Reuters Matching, EBS (Electronic Broking Services), Currenex, HotSpot FX.
Q.22 What are spot trades?
The most trades are ‘Spot’ trades with exchange of payments (settlement) taking place two days after trade date.
Q.23 What are Forwards?
Trades that are agreed today and settle in the future like 1, 2 or 6 months time are referred as ‘Forwards’ that is.”Give me a price in USD/JPY for 4 months settlement”.
Q.24 When does a country's currency strengthens?
When any country is enjoying strong economic growth their currency also strengthens.
Q.25 What is the complete definition for Foreign Exchange?
The foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.
Q.26 Identify the difference between the retail or client market and the wholesale or interbank market in foreign exchange?
The market for foreign exchange can be seen as a two-tier market. Where, one tier is the wholesale or interbank market and the other tier is the retail or client market. All the International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market.
Q.27 Who all are the market participants In foreign exchange market?
There are 5 groups in which the forex market participants can be categorized - 1. International banks - International banks provide the core of the FX market. Nearly 100 to 200 banks worldwide make a market in foreign exchange, such that they stand willing to buy or sell foreign currency for their own account. 2. Bank customers - The international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. 3. Non-bank dealers - Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs. 4. FX brokers - FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers. 5. Central banks - Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency reserves to buy one’s own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one’s own currency for foreign currency in order to increase its supply and lower its price. Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.
Q.28 How are Foreign Exchange transactions settled between International Banks?
The interbank market is a network of correspondent banking relationships, having large commercial banks maintaining demand deposit accounts with one another, referred as correspondent bank accounts. Such that the correspondent bank account network allows for the efficient functioning of the foreign exchange market. Example - Let us consider a U.S. importer desiring to purchase merchandise invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. importer’s account for the purchase of the Dutch guilders. Such that the bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit the Dutch exporter’s bank account. The importer’s bank will then debit its books to offset the debit of U.S. importer’s account, reflecting the decrease in its correspondent bank account balance.
Q.29 What do you understand by Currency Trading at a discount or at a premium in the Forward Market?
The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but generally it is higher (at a premium) or lower (at a discount) than the spot price.
Q.30 Why does Interbank Currency Trading involve the U.S. Dollar worldwide?
Since interbank trading in currencies worldwide is against a common currency that has international appeal. Where the currency has been the U.S. dollar since the end of World War II. However, the euro and Japanese yen have started to be used much more as international currencies in recent years. What is more important is that trading would be exceedingly tedious and difficult to manage if each trader made a market against all other currencies.
Q.31 Sine banks find It important to accommodate their clients’ needs to Buy Or Sell Fx Forward, for hedging purposes. How can a bank eliminate the currency exposure it created for itself by accommodating a client’s forward Transaction?
Swap transactions provides a means for the bank to mitigate the currency exposure in a forward trade. Such that a swap transaction is the continuous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of an approximately equal amount of the foreign currency. In order to illustrate this, let us suppose a bank customer wants to buy dollars three months forward against British pound sterling. Now the bank can handle this trade for its customer and simultaneously neutralize the exchange rate risk in the trade by selling (borrowed) British pound sterling spot against dollars. The bank will lend the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be used to liquidate the sterling loan.
Q.32 What do you understand by triangular arbitrage and what is a condition that gives rise to a Triangular Arbitrage Opportunity?
Triangular arbitrage can be defined as the process of trading out of the U.S. dollar into a second currency, and then trading it for a third currency, which is in turn traded for U.S. dollars. The sole objective is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate. Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Such that the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.
Q.33 What is the reason to Trade Forex?
Some of the reasons due to which investors go to trade currencies instead of making use of other opportunities are - 1. Accessibility - Forex trading takes place on many different exchanges across the world, and as a result, investors can make currency trades 24 hours a day during weekdays. The forex market is also the largest capital market in the world, involving more than US$5 trillion in notional value worth of transactions per day. 2. Liquidity - Since there is so much activity, the global forex markets provide substantial liquidity to traders. While certain assets may be more difficult to buy and sell, traders interested in currencies will likely find substantial opportunities. Liquidity risk can occur around major news events if liquidity providers seek to limit their exposure to market volatility. 3. Leverage: Investors can potentially access far more leverage when trading currencies than they can when trading other assets. However, it is important to keep in mind that risk is inherent to investment. While using leverage to make larger trades can amplify returns, it can also amplify the size of losses. 4. Global Exposure: Forex trading provides investors with an opportunity to obtain exposure to economies across the world. By taking a more international approach, traders might diversify more successfully or potentially achieve higher returns by putting their money to work in areas that have greater potential. Once again, risk is inherent to investment, so no returns are guaranteed and investors must conduct their due diligence on regions. 5. Low Trading Expenses: Because there are so many buyers and sellers, spreads are low and trading costs are modest.
Q.34 How risky is Forex Trading and what are the risks involved?
Indeed forex trading involves risk. The currency markets do experience sharp fluctuations, just like the stock, bond or commodity markets. Therefore, investors interested in forex trading are encouraged to conduct their due diligence and/or consult an independent financial advisor before making any transactions. There are specific risks involved in the forex market that can present investors with less liquidity risk because of the market’s highly liquid nature. There is less risk that an investor will find himself unable to buy or sell a currency pair since he doesn’t have another market participant to take part in a transaction. Liquidity risk can increase around major news events. Also there are some unscrupulous brokers out there. Due to which investors can benefit from performing substantial due diligence on any company they might work with. They should ensure the broker is registered with regulators such as National Futures Association in the US, the Financial Conduct Authority in the UK and/or the Australian Securities and Investments Commission in Australia. Also investors might want to research the financial institution’s reputation and find out how long it has been in business.
Q.35 How can someone trade a currency which he don’t already have?
If someone wants to trade a currency they don’t already have, there are many ways to do so. There are several different kinds of contracts they can harness to invest in currencies you don’t own. For instance they could trade the euro without owning it by buying or selling options that involve the currency. Call and put options on EUR/USD would provide methods to trade the common currency’s exchange rate with the U.S. dollar. Additionally purchasing spot contracts or forward contracts involving currency of choice would also provide exposure.
Q.36 How can we compete with the big banks?
When making trades, big banks employ professionals who may have significant education and experience. Due to which we can benefit greatly by doing your best to be prepared. When evaluating currency pairs, some traders use fundamental analysis, which involves analysing economic fundamentals in different countries. When using this technique, investors might look at GDP, inflation and unemployment in the two nations involved in an exchange rate. Another resource traders can use is technical analysis, which require reading charts to get a better sense of the market sentiment surrounding a specific currency pair. Let us suppose if we are considering taking a long position on GBP/USD, we might want to work with some technical indicators to evaluate the currency pair’s market history. On the other hand some traders may use both fundamental and technical analysis before making any transactions. By doing so, they might be able to increase their chances of competing successfully with big banks. Trading forex on margin carries a risk of losses in excess of the deposited funds and may not be suitable for all investors. As always, if we want to participate in forex trading, it can be very helpful to conduct the due diligence and/or consult an independent financial advisor.
Q.37 Where is the central location of the Forex Market?
Forex Trading is not centralized on an exchange, as with the stock and futures markets. The Forex market is considered an Over the Counter (OTC) or 'Interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
Q.38 When is the Forex Market open for trading?
It is truly a 24-hour market, such that Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Such that investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
Q.39 Do you consider Forex Trading expensive?
No forex trading is not expensive. Since most online Forex brokers allow customers to execute margin trades at up to 100:1 leverage. This indicates that investors can execute trades of $100,000 with an initial margin requirement of $1000. But it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. Also a more pragmatic margin trade for someone new to the Forex markets would be 20:1 but ultimately depends on the investor's appetite for risk.
Q.40 What Is margin in forex market?
We can consider margin essentially as a collateral for a position. Margin allows traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. Such that in the equity markets, the usual margin allowed is 50% which means an investor has double the buying power. In the forex market leverage ranges from 1% to 2%, giving investors the high leverage needed to trade actively.
Q.41 What do you understand by a 'long' or a 'short' Position?
In trading a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In the given scenario, the investor benefits from a rising market. Where on the other hand a short position is one in which the trader sells a currency in anticipation that it will depreciate. In this situation the investor benefits from a declining market. However, it is important to remember that every Forex position requires an investor to go long in one currency and short the other.
Q.42 Differentiate between an "intraday" and "overnight Position"?
Intraday positions are all positions which are opened and closed anytime during normal trading. Overnight positions are positions that are still on at the end of normal trading hours, which are usually rolled over by your Forex broker (based on the currencies interest rate differentials) to the next day's price.
Q.43 How are Currency Prices determined?
Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.
Q.44 How should we Manage Risk in Forex Market?
One of the most common risk management tools in Forex trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. Where a stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor's position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.
Q.45 What type of Forex Trading strategy should be used?
All currency traders make decisions using both technical factors and economic fundamentals. All the technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumour. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.
Q.46 How often are Trades made?
The number of trades depend on the market condition where market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day. Most importantly, since most Forex Brokers do not charge commission, traders can take positions as often as necessary without worrying about excessive transaction costs.
Q.47 How should we maintain long positions?
Approximately 80% of all forex trades last seven days or less, while more than 40% last fewer than two days. General rule says that a position is kept open until one of the following event occurs - 1. Realization of sufficient profits from a position. 2. Specified stop-loss is triggered. 3. Another position that has a better potential appears and you need these funds.
Q.48 What do you understand by a Limit Order?
A limit order is an order with restrictions on the maximum price to be paid or the minimum price to be received. Let us suppose if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below 117.05. (i.e. 116.50).
Q.49 What do you understand by a Stop Loss Order?
A stop loss order is an order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. Let us suppose if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Q.50 If the dollar depreciates relative to the Swiss franc then what will be the effect on Swiss chocolate in the United States
Swiss chocolate will become more expensive in the United States.
Q.51 Why does the supply curve for bonds slope upward?
Because as the interest rate rises, firms are more willing to borrow money.
Q.52 What is the difference betweeen Keynesian and Friedman money demand relationships ?
Friedman money demand depends on permanent income but permanent income has no role in Keynesian money demand.
Q.53 What is Libor ?
Libor is a benchmark interest rate set by surveying a panel of top banks in London each day, asking what rate they have to pay to borrow for various loan periods
Q.54 What is Eurocurrency ?
Currency which is deposited or lent out outside the jurisdiction of the country where the currency was issued
Q.55 What will the yield curve look like if future short-term interest rates are expected to rise sharply?
It will steeply slope upward.
Q.56 Why do current prices on previously issued bonds offered for resale change when the market interest rate changes?
Because no buyer of bonds today will accept a lower yield to maturity than the market rate, and no buyer will be able to get a higher yield.
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