SIAA Foreign Exchange common mistakes
SIAA Foreign Exchange · Understand the traps and how to avoid them.
Quoting the spot rate in the wrong direction (e.g., giving USD/JPY when the client asked for JPY/USD, or applying a bid where an ask is required), so the final number is the reciprocal of the correct one.
Candidates memorize a single 'standard' quote per pair and stop checking which currency is the base; the exam deliberately supplies pairs in both conventions and in European terms, and the reciprocal error is easy to make silently because the magnitude still looks plausible.
What to do instead
Before any calculation, write the pair with its base and terms currencies explicitly (BASE/TERM) and state the units of the answer ('JPY per 1 USD'). Derive the reciprocal only after confirming which side the client is on, then sanity-check that the answer moves in the expected direction when the base currency strengthens.
Confusing an FX swap with a currency swap: pricing or describing an FX swap as if principal were exchanged at inception and re-exchanged at maturity, or treating a currency swap as a short-dated rollover tool.
The names sound interchangeable and both involve two currencies and two dates; candidates learn the mechanics of one and pattern-match the other, missing that an FX swap is a spot plus forward (no initial principal exchange beyond the near leg) while a currency swap typically exchanges notionals and periodic interest.
What to do instead
Build a two-column comparison card: number of legs, principal exchange, interest payments, typical tenor, credit exposure, and use case. Answer any question by first identifying tenor and whether interest payments are involved, since those two features separate the products most reliably.
Applying covered interest rate parity with the interest rates inverted (using the base currency rate where the terms currency rate belongs) or compounding simple rates over the forward period.
The formula F = S x (1 + i_term)/(1 + i_quote) is memorized as a shape, not as a logic, so candidates plug rates into whichever slot appears first; they also forget to prorate annualized rates to the actual day count of the forward.
What to do instead
Derive the forward from first principles each time: what does it cost to borrow the base, convert at spot, and invest the terms currency? Then confirm the higher-yielding currency must trade at a forward discount. Always scale rates by days/360 or days/365 as stated in the question.
Treating a forward hedge as eliminating all FX risk, ignoring that the hedge creates a fixed obligation and leaves the hedged item exposed to credit, liquidity, and mark-to-market variation margin risk.
Candidates equate 'hedged' with 'safe' and answer hedging questions purely on the direction of the rate move, overlooking that a forward locks in a rate but can produce opportunity cost, collateral calls, and counterparty exposure.
What to do instead
For every hedging question, list what is locked (the rate) and what is not (counterparty credit, collateral, basis, opportunity cost). Compare forwards, options, and money-market hedges on cost, flexibility, and balance-sheet impact rather than on direction alone.
Computing a cross rate by multiplying or dividing the two given quotes without verifying that the intermediate currency cancels correctly.
Under exam time pressure, candidates chain the numbers in the order presented rather than in the order that makes the units cancel, producing a cross rate that is dimensionally wrong but numerically close enough to look right.
What to do instead
Write every quote as a fraction with explicit units and cancel currencies algebraically before touching numbers. If the intermediate currency does not cancel, invert one quote first. Then check the cross against a rough sense of the fair level.
Recommending a structured product or option strategy to a client without matching it to the client's stated objective, risk tolerance, and sophistication, or documenting suitability only after the trade.
Candidates focus on the payoff diagram and expected return, treating suitability as a compliance afterthought; the exam rewards the advisory sequence, and questions are written so the technically optimal product is unsuitable for the stated client.
What to do instead
Adopt a fixed order: gather objectives, constraints, and experience; identify the risk being transferred; select the instrument; then document why that instrument fits. Rehearse writing a short suitability rationale that names the client's objective and the specific risk the product addresses.
Overlooking settlement conventions: value dates that skip weekends and holidays, T+2 versus T+1 for particular pairs, and the resulting broken-date or end-of-month forward pricing.
Candidates calculate the forward period as a simple calendar subtraction and forget that spot value date drives the forward date, that some currencies settle T+1, and that month-end and holiday rolls shift the maturity.
What to do instead
Practice the value-date workflow: spot date first, then add the forward tenor, then roll for weekends and the relevant currency holidays, and finally check for end-of-month convention. Show each step in the answer so partial credit is earned even if the final date is off.
Describing the interbank market as a single centralized exchange and misassigning the roles of dealer, broker, and platform, or misstating who bears counterparty risk in a trade.
Equity-market intuition leads candidates to assume a central exchange with a clearinghouse; the FX market is decentralized and over-the-counter, so the roles and the locus of credit risk differ, and candidates import the wrong mental model.
What to do instead
Memorize a simple market map: who quotes, who intermediates, who settles, and where credit risk sits at each step. Contrast bilateral OTC trading with prime brokerage and platform-based execution, and note the effect of CLS and bilateral netting on settlement risk.
Ignoring conduct and compliance obligations in scenario questions, such as front-running a client order, mishandling confidential order flow, or accepting a trade outside mandate, because the scenario 'looks like' a pure pricing problem.
Candidates treat ethics items as a separate topic rather than as an overlay on every transaction, so they answer the numerical part and overlook the embedded conflict of interest or information barrier.
What to do instead
After solving any scenario, run a short compliance checklist: conflicts of interest, use of confidential information, mandate limits, best execution, and record-keeping. In ethics items, identify the duty owed and to whom before choosing an action.
Misreading option terminology and payoff direction: confusing a call on a currency with the right to sell it, mixing premium payer and receiver, or reporting the payoff in the wrong currency.
Currency options have two currencies, so 'call' is ambiguous unless the base currency is stated; candidates carry over equity-option intuition and invert the exposure, especially on the hedging side.
What to do instead
Always restate the option in full: 'the right to buy [base currency] with [terms currency] at strike K'. Draw the payoff in the currency the client actually receives, and verify direction with one extreme scenario (e.g., the base currency goes to zero) before finalizing.