Top 8 FX Interview Questions

As I wrote about in the rather long sales and trading overview post, FX is one of the more interesting areas of a trading floor to be on. In particular if you like flow trading and like to think in relativistic terms (because everything in FX is relative).

Much like rates trading, FX trading is also a good place to be if you enjoy following macro themes. Generally what moves FX markets are relative differences in macro-economic expectations between countries although you can have geopolitical conflicts, close elections, etc. also affect FX crosses. When I refer to macro-economic expectations, what I really am referring to is interest rate expectations (which obviously are informed by other factors like GDP growth, unemployment rates, etc.).

Interestingly, when I first joined Goldman Sachs as a summer analyst I expected lots of people in my summer analyst class to want to join FX desks for their first rotation. I figured that because FX was obviously a well known asset class - compared to distressed debt or CLOs - that you'd have people flock to what is familiar to them. Instead, the FX desks weren't overly popular.

In retrospect, I think this is probably because people worried about "automation", but didn't realize that FX has already been heavily automated. Today if you join a FX desk you'll likely be doing something that simply can't be automated as if it could have been, then it would already have been.

All FX desks are reasonably alike. They involve lots of flow (which means lots of trading), needing to make quick markets, dealing with a large and diverse group of clients, and generally being very reactive (meaning you don't have a lot of time to think during the day). For some, this may all sound great. For others, this may all sound terrible.

The great thing about sales and trading is that there's such a diversity of desks that there is always a handful of them that will fit your personality and preferences. 

Generally, on a trading floor you'll have at least three different FX desks:

  • G10 FX
  • Emerging Markets (EM) FX
  • FX Options

Generally, you only will go into EM FX if you know some relevant foreign languages or were born in one of the EM countries covered. For those who want a slightly less flow-oriented desk that involves more math and the occasional model, then working on the options desk would be the right move. Finally, for those who love flow trading and always needing to keep up-to-date on the largest markets then there's hardly a better desk on the entire trading floor than G10 FX. 

FX Interview Questions

If you want to skip around to some of the questions asked here, just click the links below.

Question 1: If USD / GBP is quoted at 1.375 / 1380, then at what rate would you deal if a client said they wanted to buy GBP?

Question 2: Let's say you make a market for clients on JPY at 110.77 / 110.80. They buy $5mm from you. At what rate did the deal get done at?

Question 3: Keeping with our prior example, what is your position now in JPY and your position in USD?

Question 4: Now, JPY is being quoted 110.90 / 110.95. Is the dollar higher or lower than when you did the trade?

Question 5: If CAD / USD is 1.2550 / 1.2560 and JPY / USD is 110.90 / 110.95, then what is JPY / CAD?

Question 6: How is a forward rate arrived at in FX?

Question 7: What are the one-year forward points on EUR / USD if spot is 1.1925, 1 year EUR interest rate is 1.25, 1 YR USD interest rate is 1.75, and t is 365?

Question 8: What happens to a forward if the base currency's interest rates increase?

If USD / GBP is quoted at 1.375 / 1380, then at what rate would you deal if a client said they wanted to buy GBP?

In my experience, some have trouble getting up to speed on the terminology and quotation structure in FX. As a summer analyst, one of the best ways you can stand out is to just have a rough understanding of quotation structures.

So for this question, as the dealer (meaning on the sell-side making a market for your client), you'd say you'd buy GBP / sell USD at 1.375.

Let's say you make a market for clients on JPY at 110.77 / 110.80. They buy $5mm from you. At what rate did the deal get done at?

The deal is done at the offer side (not the bid side), so at 110.80.The client may ask you to make a market without indicating their "direction", which means whether they want to buy or sell. So depending on the kind of market you make they may offer you, which means you'd pay the bid you quoted (110.77). Otherwise, like in this example, they may buy meaning you receive the offer side from the client (110.80).

Keeping with our prior example, what is your position now in JPY and your position in USD?

After the trade, you are now short $5mm USD and are long ¥554,000 JPY.

Now, JPY is being quoted 110.90 / 110.95. Is the dollar higher or lower than when you did the trade?

The dollar is higher. Think about it this way: a singular dollar now buys you slightly more yen than previously. Imagine if I told you that you could buy two apples with a dollar. Then I came to you a day latter and said actually, you can buy three apples with a dollar. In the case (obviously!) apples have gotten cheaper (or you could say the dollar has gotten stronger, as now you can buy more apples). 

If CAD / USD is 1.2550 / 1.2560 and JPY / USD is 110.90 / 110.95, then what is JPY / CAD?

Here we're just determining the cross rate for JPY / CAD, which can be found by looking at two different rates that each have one of the variables we're looking for.

So on the bid side of our new quote, we'll buy CAD / sell USD on the offer side at 1.2560. We'll then sell JPY and buy USD on the bid side at 110.90. Therefore, 1 CAD = 110.90 / 1.2560 = 88.30 JPY per CAD.

On the offer side on our new quote, we'll sell CAD and buy USD at 1.2550. We'll then buy JPY and sell USD at 110.95. Therefore, 1 CAD = 110.95 / 1.2550 = 88.41 JPY per CAD.

So we can quote JPY / CAD as being 88.30 / 88.41. 

Note: Of course, when you come up with your final answer you should have your offer side be larger than your bid side! If it's not, check to make sure you didn't mistakingly use a bid or offer side number incorrectly somewhere in your calculations.

How is a forward rate arrived at in FX?

Often a client will want to do an outright forward in which a transaction is locked in at a certain price for a future date. Typically forwards will involve settlements in the near-term (under a few weeks), but can hypothetically go out years.

A forward can really be thought of as a combination of a spot transaction with some forward points applied to it in order to take into account the time sensitivity / variability of the transaction. These points can either be negative in value or positive (thus the forward rate can be above or below the current spot rate observed in the market).

Importantly, what informs forward points is not the expectation of the future trading level of the currency per se, but rather the interest rate differential. Forward points can be calculated by the following formula:

Forward Points = (Spot Rate)*(E2-E1)*(t/360)*100

Where E2 is the secondary interest rate, E1 is the dominate interest rate, and t is the number of days to maturity.

What are the one-year forward points on EUR / USD if spot is 1.1925, 1 year EUR interest rate is 1.25, 1 YR USD interest rate is 1.75, and t is 365?

Here we can just apply our formula, which will be: Forward Points = 1.1925*(1.75-1.25)*(365/360)*100. This gives us 60.45. This can then be applied to the spot rate to get our ultimate forward rate.

What happens to a forward if the base currency's interest rates increase?

This will decrease the value of the forward all else being held equal. So, if we look at the example above and increase the EUR 1 year rate of interest to 1.35, we get a value of 48.36, which is obviously a decrease from what it was previously. 

Similarly, if the interest rates of the base currency decrease, that will lead to an increase in the forward value.

Conclusion

Not too long ago I received an e-mail from someone who was going through the sales and trading prep course I put together. They were quite interested in EM FX because they knew an impressively large number of European languages. However, they were worried about the future of the industry due to how much automation has occurred in FX over the past few decades.

The reality is that FX sales or trading within any large investment bank is a great training ground. In fact, over the past ten years it's been one of the best. This is because with the rise of crypto trading platforms, crypto-focused hedge funds, and general fin-tech companies focused on cross-currency payments there has never been a greater demand for those who have been properly trained in FX at a large investment bank. 

When you work at a large bank part of what you learn about is infrastructure. You learn how the sausage is made; how liquidity pools together, what to look for when markets feel tight, and how to deal with large flows of capital. 

Personally, I can't possibly see the number of people on FX desks within major investment banks declining over the next ten years. The reality is that all the automation that really could have happened has already happened. The low hanging fruit is gone and through my time in S&T I never saw reductions in FX desks (in fact, at GS it grew). 

Many people reading this - who are looking to join a place like Morgan Stanley, Barclays, RBC, Bank of America, etc. - will be a bit paranoid about where they start their career. That's perfectly understandable. However, when you join a desk that has solid exit opportunities always available to you, that should diminish any concern you have.

Working at a fancy investment bank that's hard to break into will give you the kind of pedigree and prestige necessary to move to other exiting roles in burgeoning areas. Remember, one of the co-founders of CoinBase worked in FX at Goldman.

If you're looking to join a sales and trading program, keep in mind that interviews are always for generalist positions. Meaning even if you want to work in FX, for example, you won't be asked just FX questions. Here's a larger list of sales and trading interview questions I put together to help you in your prep. 

Best of luck!

Zach

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