Forex Management Interview Questions & Answers

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Forex Management Interview Questions & Answers

Do you have bachelor’s degree in Economics, Finance or a similar area? Do you want to explore yourself in Forex management then log on to Wisdom jobs online site. Forex management is planning of foreign exchange, reserving, controlling, hedging and maximizes the consolidated earnings. It requires its participants to enter the market to deliver and accept currencies at fluctuating exchange rates. This refers to the network of individuals, banks and organized financial exchanges that trade global currencies. Today, scope of Forex management is very wide in companies, firms and individuals uses foreign currency for achieving their aims. It is also needed for importers, exporters, banks, tax departments. So, enhance your financial skills by upgrading yourself in the field of forex as chief manager, sales manager, in banks, in companies etc by looking into Forex management jobs question and answers given.

Forex Management Interview Questions

Forex Management Interview Questions
    1. Question 1. Give A Full Definition Of The Market For Foreign Exchange.

      Answer :

      Broadly defined, 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.

    2. Question 2. What Is The Difference Between The Retail Or Client Market And The Wholesale Or Interbank Market For Foreign Exchange?

      Answer :

      The market for foreign exchange can be viewed as a two-tier market. One tier is the wholesale or interbank market and the other tier is the retail or client market. 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.

    3. Question 3. Who Are The Market Participants In The Foreign Exchange Market?

      Answer :

      The market participants that comprise the FX market can be categorized into five groups:

      international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. 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.

      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. 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.

      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.

    4. Question 4. How Are Foreign Exchange Transactions Between International Banks Settled?

      Answer :

      The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, 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. 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.

    5. Question 5. What Is Meant By A Currency Trading At A Discount Or At A Premium In The Forward Market?

      Answer :

      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 usually it is higher (at a premium) or lower (at a discount) than the spot price.

    6. Question 6. Why Does Most Interbank Currency Trading Worldwide Involve The U.s. Dollar?

      Answer :

      Trading in currencies worldwide is against a common currency that has international appeal. That 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. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.

    7. Question 7. Banks Find It Necessary To Accommodate Their Clients’ Needs To Buy Or Sell Fx Forward, In Many Instances For Hedging Purposes. How Can The Bank Eliminate The Currency Exposure It Has Created For Itself By Accommodating A Client’s Forward Transaction?

      Answer :

      Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of an approximately equal amount of the foreign currency. To illustrate, suppose a bank customer wants to buy dollars three months forward against British pound sterling. 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.

       

       

    8. Question 8. A Cd/$ Bank Trader Is Currently Quoting A Small Figure Bid-ask Of 35-40, When The Rest Of The Market Is Trading At Cd1.3436-cd1.3441. What Is Implied About The Trader’s Beliefs By His Prices?

      Answer :

      The trader must think the Canadian dollar is going to appreciate against the U.S. dollar and therefore he is trying to increase his inventory of Canadian dollars by discouraging purchases of U.S. dollars by standing willing to buy $ at only CD1.3435/$1.00 and offering to sell from inventory at the slightly lower than market price of CD1.3440/$1.00.

    9. Question 9. What Is Triangular Arbitrage? What Is A Condition That Will Give Rise To A Triangular Arbitrage Opportunity?

      Answer :

      Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose 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. Nevertheless, 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.

    10. Question 10. Over The Past Six Years, The Exchange Rate Between Swiss Franc And U.s. Dollar, Sfr/$, Has Changed From About 1.30 To About 1.60. Would You Agree That Over This Six-year Period, The Swiss Goods Have Become Cheaper For Buyers In The United States? (update? Sf Has Gone From Sf1.67/$ To Sf1.04/$ Over The Last Six Years.)

      Answer :

      The value of the dollar in Swiss francs has gone up from about 1.30 to about 1.60. Therefore, the dollar has appreciated relative to the Swiss franc, and the dollars needed by Americans to purchase Swiss goods have decreased.

    11. Question 11. What Does Trading Forex Mean?

      Answer :

      Trading forex means making transactions that involve currencies in the foreign exchange market. This could mean buying a certain currency pair, such as EUR/USD, based on the expectation the euro will appreciate relative to the U.S. dollar. Alternatively, an investor could sell the same pair, based on the belief the common currency will depreciate against the U.S. dollar.

      In addition to making basic purchase and sale transactions, traders have many ways to take positions on currency pairs, including spot contracts, forwards, derivatives and contracts for difference.

    12. Question 12. Why Should I Trade Forex?

      Answer :

      There are several reasons investors might opt to trade currencies instead of making use of other opportunities.

      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.1)
      Liquidity: Because 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.
      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.
      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.
      Low Trading Expenses: Because there are so many buyers and sellers, spreads are low and trading costs are modest.

       

    13. Question 13. How Risky Is Forex Trading?

      Answer :

      Like any form of investment, forex trading involves risk. The currency markets can 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.

      In terms of specific risks, the forex market can present investors with less liquidity risk because of this particular market’s highly liquid nature. In other words, there is less risk that an investor will find himself unable to buy or sell a currency pair because he doesn’t have another market participant to take part in a transaction. Liquidity risk can increase around major news events.

      It is also worth noting that there are some unscrupulous brokers out there. As a result, investors can benefit from performing substantial due diligence on any company they might work with. For starters, 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. Additionally, investors might want to research the financial institution’s reputation and find out how long it has been in business.

    14. Question 14. How Can I Trade A Currency I Don’t Already Have?

      Answer :

      If you want to trade a currency you don’t already have, there are many ways to do so. There are several different kinds of contracts you can harness to invest in currencies you don’t own. For example, you 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.

      In addition, purchasing spot contracts or forward contracts involving your currency of choice would also provide exposure.

    15. Question 15. How Can I Compete With The Big Banks?

      Answer :

      When making trades, big banks employ professionals who may have significant education and experience. As a result, you can benefit greatly by doing your best to be prepared. When evaluating currency pairs, some traders use fundamental analysis, which involves analyzing 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 utilize is technical analysis, which involves reading charts to get a better sense of the market sentiment surrounding a specific currency pair. For example, if you are considering taking a long position on GBP/USD, you might want to work with some technical indicators to evaluate the currency pair’s market history.

      Some traders might 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 your deposited funds and may not be suitable for all investors. As always, if you want to participate in forex trading, it can be very helpful to conduct your due diligence and/or consult an independent financial advisor.

    16. Question 16. Where Is The Central Location Of The Forex Market?

      Answer :

      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. 

    17. Question 17. Who Are The Participants In The Forex Market?

      Answer :

      The Forex market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

    18. Question 18. When Is The Forex Market Open For Trading?

      Answer :

      A true 24-hour market, 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. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. 

    19. Question 19. Is Forex Trading Expensive?

      Answer :

      No. Most online Forex brokers allow customers to execute margin trades at up to 100:1 leverage. This means that investors can execute trades of $100,000 with an initial margin requirement of $1000. However, 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. 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.

    20. Question 20. What Is Margin?

      Answer :

      Margin is essentially collateral for a position. It allows traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. 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. 

    21. Question 21. What Does It Mean Have A 'long' Or 'short' Position?

      Answer :

      In trading parlance, 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 this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, 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. 

    22. Question 22. What About Terms Like "bid/ask", "spread", And "rollover"?

      Answer :

      Please check our extensive Glossary for detailed definitions of all Forex related terms. 

    23. Question 23. What Is The Difference Between An "intraday" And "overnight Position"?

      Answer :

      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. 

    24. Question 24. How Are Currency Prices Determined?

      Answer :

      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. 

    25. Question 25. How Do I Manage Risk?

      Answer :

      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. 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. 

    26. Question 26. What Kind Of Forex Trading Strategy Should I Use?

      Answer :

      Currency traders make decisions using both technical factors and economic fundamentals. 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 rumor. 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.

    27. Question 27. How Often Are Trades Made?

      Answer :

      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, because most Forex Brokers don't charge commission, traders can take positions as often as necessary without worrying about excessive transaction costs. 

    28. Question 28. How Long Are Positions Maintained?

      Answer :

      Approximately 80% of all forex trades last seven days or less, while more than 40% last fewer than two days. As a general rule, a position is kept open until one of the following occurs: 1) realization of sufficient profits from a position; 2) the specified stop-loss is triggered; 3) another position that has a better potential appears and you need these funds.

    29. Question 29. What Is A Limit Order?

      Answer :

      A limit order is an order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, 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. (ie 116.50). 

    30. Question 30. What Is A Stop Loss Order?

      Answer :

      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. As an example, 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.

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