Spot Exchange Rates and Quotation Conventions
Base and quote currency
Every FX quote pairs a base currency (the one unit being priced) and a quote or term currency (the currency in which the price is expressed). In EUR/USD = 1.0850, one euro costs 1.0850 US dollars. Candidates must be able to invert a quote, convert a price into a different quotation direction, and explain bid/offer (bid is where the dealer buys the base, offer is where the dealer sells the base). The spread is the dealer's compensation for risk and liquidity provision.
Market conventions
Know the standard conventions: most pairs are quoted in units of quote currency per unit of base; EUR, GBP, AUD, and NZD are conventionally the base against USD, while USD is the base against most other currencies. JPY quotes carry two decimals and reflect a much larger numeric value per unit. Understand pips (usually the fourth decimal, second for JPY pairs) and the difference between a pip and a point. Settlement is typically T+2 for most pairs, with USD/CAD traditionally T+1 and some pairs settling same day.
Traps in questions
Frequent errors: reversing bid and offer when inverting a quote (the inverse bid equals one divided by the original offer); applying the wrong pip definition to JPY pairs; forgetting that value dates shift with holidays in either currency's settlement centre; and confusing a nominal appreciation of one currency with a real change after inflation. Also watch for questions that mix up direct and indirect quotation terminology, which varies by country.
Rule of thumb
Always write the quote with an explicit base and quote label before calculating. Bid < offer always, in the stated direction; if your inverted quote violates that, you inverted the wrong side.
Worked example
Dealer quotes EUR/USD 1.0845 / 1.0855. To invert, the customer's bid for USD/EUR is 1/1.0855 = 0.9212 and the offer is 1/1.0845 = 0.9221. The spread widens in the inverted direction because both sides are reciprocal of opposite sides.