FX Specialist 1 cheat sheet

FX market structure: an over-the-counter (OTC) decentralized dealer market; the interbank segment trades bilaterally and via electronic platforms such as EBS and Refinitiv Matching.

Size ranking: FX is the largest global financial market by turnover; spot is the largest single instrument, followed by FX swaps, then outright forwards.

Trading sessions: Sydney/Tokyo, then London, then New York overlap; liquidity and spread tightness peak when London and New York overlap.

Price convention: base currency (nominally one unit) versus quote (counter) currency; a rise in the quote means the base currency appreciated.

Major pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF) carry the tightest spreads; exotic pairs carry wider spreads and higher volatility.

Participants: reporting dealers (banks), other financial institutions (hedge funds, pension funds, insurers), and non-financial corporates; central banks intervene occasionally.

Market makers quote two-way prices and earn the bid-ask spread; price takers (corporates, smaller banks) transact at the quoted spread.

Currency convertibility and capital controls restrict deliverability; non-deliverable forwards (NDFs) exist for restricted currencies such as CNY, INR, and BRL.

Spot value date: T+2 business days for most pairs; T+1 for USD/CAD, USD/RUB, and USD/TRY; T+0 for same-day (cash) trades.

Forward points reflect the interest rate differential: forward = spot × (1 + r_quote × days/360) / (1 + r_base × days/360).

If the quote-currency interest rate exceeds the base-currency rate, forward points are positive (forward premium for the base currency).

Forward points are quoted as pips and added to (or subtracted from) the spot rate to derive the outright forward; they are not a forecast of spot.

Forward value date convention: spot date plus the forward tenor, adjusted for month-end and holiday rules; the end-of-month rule keeps both dates on the last business day.

A broken-date (odd-date) forward is any tenor not matching standard periods (1W, 1M, 2M, 3M, 6M, 1Y); priced by interpolating forward points.

Non-deliverable forward (NDF): cash-settled against an official fixing rate; used where the currency is restricted or non-deliverable.

Forward contract obligations are binding; no upfront premium is paid, unlike an option. Settlement risk exists if one party defaults before the value date.

FX swap: simultaneous spot and forward legs in opposite directions on the same currency pair; used for short-term funding and rolling hedges; near leg at spot, far leg at forward.

Cross-currency basis swap: exchanges floating-rate payments in two currencies plus principal at start and maturity; pricing reflects the cross-currency basis (supply/demand for USD funding).

Interest rate parity (covered): forward premium/discount equals the interest rate differential; deviations create arbitrage opportunities until the basis closes.

Currency option: right (not obligation) to buy (call) or sell (put) a currency at a strike; premium depends on spot, strike, volatility, time to expiry, and rate differentials.

Garman-Kohlhagen model prices European FX options; inputs are spot, strike, domestic rate, foreign rate, volatility, and time.

Delta measures option price sensitivity to spot; a delta-hedged position requires rebalancing as spot moves (gamma risk).

Currency swap vs FX swap: a cross-currency swap involves periodic interest payments and principal exchange; an FX swap is a spot plus forward transaction.

Structured products (e.g., range accruals, dual-currency notes) embed FX options; their payoff and risk must be decomposed into plain-vanilla components.

Quotation direction: European terms quote USD as base (USD/JPY); American terms quote USD as quote currency (EUR/USD); direct quote expresses foreign currency in domestic units.

Pip: fourth decimal place for most pairs; second decimal for JPY pairs; a pip = 0.0001 (or 0.01 for JPY).

Cross rate from two USD pairs: EUR/JPY = EUR/USD × USD/JPY; verify the base/quote alignment before multiplying.

Bid-ask spread: market maker buys at bid, sells at ask; spread = ask − bid; percentage spread = (ask − bid)/ask × 100.

Inverse rate: if EUR/USD = 1.1000, then USD/EUR = 1/1.1000 = 0.9091; bid and ask invert and swap positions.

Forward points formula: points = spot × (r_quote − r_base) × days/360 (approximately); exact formula uses compounding.

Triangular arbitrage: if quoted cross rate differs from the implied cross rate, buy low and sell high across the three pairs until prices converge.

Rounding conventions and quotation precision vary by pair; confirm the number of decimals and the settlement convention before pricing.

Transaction exposure: risk from existing foreign-currency receivables/payables; hedged with forwards, futures, options, or money-market hedges.

Translation (accounting) exposure: impact of FX moves on consolidated financial statements of foreign subsidiaries; hedged with balance-sheet or net-investment hedges.

Economic (operating) exposure: long-term impact on competitiveness and cash flows; managed through operational changes (pricing, sourcing, matching currency of costs and revenues).

Money-market hedge: borrow in one currency, convert at spot, invest in the other; replicates a forward when interest rate parity holds.

Natural hedge: matching currency of revenues and costs; reduces the need for derivative hedges.

Hedge ratio and effectiveness: measure the change in fair value of the hedging instrument versus the hedged item; effectiveness thresholds apply under hedge accounting.

Options hedge downside while retaining upside; forwards lock in a rate and remove both downside and upside.

Value-at-Risk (VaR): estimates potential loss at a confidence level and horizon; assumes historical correlations and volatility; backtesting validates the model.

Know-your-customer (KYC) and anti-money-laundering (AML): identify beneficial owners, monitor transactions, and file suspicious activity reports.

Sanctions screening: screen counterparties, beneficial owners, and payment routes against lists (OFAC, EU, UN); reject or block prohibited transactions.

Market conduct: prohibitions on front-running, spoofing, wash trades, and sharing confidential client order information (last look and pre-hedging must be disclosed).

Best execution: firms must take reasonable steps to obtain the best outcome for clients considering price, cost, speed, and likelihood of execution.

Recordkeeping: retain trade records, communications, and confirmations for the regulatory retention period; audit trails must be reconstructable.

Licensing and registration: dealing, advising, or arranging in FX may require authorization depending on jurisdiction and client type (retail vs professional).

Benchmark integrity: submissions to fixings (e.g., WM/Refinitiv, ECB reference rates) must be based on actual transactions and free from manipulation.

Conflicts of interest: identify, disclose, and manage conflicts; personal account dealing and gifts/entertainment policies apply.

CLS (Continuous Linked Settlement): multilateral payment-versus-payment (PVP) settlement for eligible currencies; reduces Herstatt (settlement) risk.

Herstatt risk: risk that one leg of an FX transaction settles but the counterparty fails before the other leg settles; mitigated by PVP and netting.

SWIFT MT300 (confirmation), MT202 (general financial institution transfer), and ISO 20022 (pacs.008, camt.053) are standard messaging formats.

Confirmation must include trade date, value date, currency pair, amounts, rate, settlement instructions, and counterparty identifiers; matched confirmations reduce disputes.

Bilateral netting and payment netting reduce the number of payments and settlement exposure; close-out netting governs default.

SSI (standing settlement instructions): verified account details for each currency; changes require call-back verification to prevent fraud.

Trade lifecycle: execution, confirmation/affirmation, clearing (where applicable), settlement, and reconciliation; breaks must be investigated and resolved.

ISDA Master Agreement and Credit Support Annex (CSA) govern derivatives documentation, collateral, and close-out netting between counterparties.

FX market structure: an over-the-counter (OTC) decentralized dealer market; the interbank segment trades bilaterally and via electronic platforms such as EBS and Refinitiv Matching.

Size ranking: FX is the largest global financial market by turnover; spot is the largest single instrument, followed by FX swaps, then outright forwards.

Trading sessions: Sydney/Tokyo, then London, then New York overlap; liquidity and spread tightness peak when London and New York overlap.

Price convention: base currency (nominally one unit) versus quote (counter) currency; a rise in the quote means the base currency appreciated.

Major pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF) carry the tightest spreads; exotic pairs carry wider spreads and higher volatility.

Participants: reporting dealers (banks), other financial institutions (hedge funds, pension funds, insurers), and non-financial corporates; central banks intervene occasionally.

Market makers quote two-way prices and earn the bid-ask spread; price takers (corporates, smaller banks) transact at the quoted spread.

Currency convertibility and capital controls restrict deliverability; non-deliverable forwards (NDFs) exist for restricted currencies such as CNY, INR, and BRL.

Spot value date: T+2 business days for most pairs; T+1 for USD/CAD, USD/RUB, and USD/TRY; T+0 for same-day (cash) trades.

Forward points reflect the interest rate differential: forward = spot × (1 + r_quote × days/360) / (1 + r_base × days/360).

If the quote-currency interest rate exceeds the base-currency rate, forward points are positive (forward premium for the base currency).

Forward points are quoted as pips and added to (or subtracted from) the spot rate to derive the outright forward; they are not a forecast of spot.

Forward value date convention: spot date plus the forward tenor, adjusted for month-end and holiday rules; the end-of-month rule keeps both dates on the last business day.

A broken-date (odd-date) forward is any tenor not matching standard periods (1W, 1M, 2M, 3M, 6M, 1Y); priced by interpolating forward points.

Non-deliverable forward (NDF): cash-settled against an official fixing rate; used where the currency is restricted or non-deliverable.

Forward contract obligations are binding; no upfront premium is paid, unlike an option. Settlement risk exists if one party defaults before the value date.

FX swap: simultaneous spot and forward legs in opposite directions on the same currency pair; used for short-term funding and rolling hedges; near leg at spot, far leg at forward.

Cross-currency basis swap: exchanges floating-rate payments in two currencies plus principal at start and maturity; pricing reflects the cross-currency basis (supply/demand for USD funding).

Interest rate parity (covered): forward premium/discount equals the interest rate differential; deviations create arbitrage opportunities until the basis closes.

Currency option: right (not obligation) to buy (call) or sell (put) a currency at a strike; premium depends on spot, strike, volatility, time to expiry, and rate differentials.

Garman-Kohlhagen model prices European FX options; inputs are spot, strike, domestic rate, foreign rate, volatility, and time.

Delta measures option price sensitivity to spot; a delta-hedged position requires rebalancing as spot moves (gamma risk).

Currency swap vs FX swap: a cross-currency swap involves periodic interest payments and principal exchange; an FX swap is a spot plus forward transaction.

Structured products (e.g., range accruals, dual-currency notes) embed FX options; their payoff and risk must be decomposed into plain-vanilla components.

Quotation direction: European terms quote USD as base (USD/JPY); American terms quote USD as quote currency (EUR/USD); direct quote expresses foreign currency in domestic units.

Pip: fourth decimal place for most pairs; second decimal for JPY pairs; a pip = 0.0001 (or 0.01 for JPY).

Cross rate from two USD pairs: EUR/JPY = EUR/USD × USD/JPY; verify the base/quote alignment before multiplying.

Bid-ask spread: market maker buys at bid, sells at ask; spread = ask − bid; percentage spread = (ask − bid)/ask × 100.

Inverse rate: if EUR/USD = 1.1000, then USD/EUR = 1/1.1000 = 0.9091; bid and ask invert and swap positions.

Forward points formula: points = spot × (r_quote − r_base) × days/360 (approximately); exact formula uses compounding.

Triangular arbitrage: if quoted cross rate differs from the implied cross rate, buy low and sell high across the three pairs until prices converge.

Rounding conventions and quotation precision vary by pair; confirm the number of decimals and the settlement convention before pricing.

Transaction exposure: risk from existing foreign-currency receivables/payables; hedged with forwards, futures, options, or money-market hedges.

Translation (accounting) exposure: impact of FX moves on consolidated financial statements of foreign subsidiaries; hedged with balance-sheet or net-investment hedges.

Economic (operating) exposure: long-term impact on competitiveness and cash flows; managed through operational changes (pricing, sourcing, matching currency of costs and revenues).

Money-market hedge: borrow in one currency, convert at spot, invest in the other; replicates a forward when interest rate parity holds.

Natural hedge: matching currency of revenues and costs; reduces the need for derivative hedges.

Hedge ratio and effectiveness: measure the change in fair value of the hedging instrument versus the hedged item; effectiveness thresholds apply under hedge accounting.

Options hedge downside while retaining upside; forwards lock in a rate and remove both downside and upside.

Value-at-Risk (VaR): estimates potential loss at a confidence level and horizon; assumes historical correlations and volatility; backtesting validates the model.

Know-your-customer (KYC) and anti-money-laundering (AML): identify beneficial owners, monitor transactions, and file suspicious activity reports.

Sanctions screening: screen counterparties, beneficial owners, and payment routes against lists (OFAC, EU, UN); reject or block prohibited transactions.

Market conduct: prohibitions on front-running, spoofing, wash trades, and sharing confidential client order information (last look and pre-hedging must be disclosed).

Best execution: firms must take reasonable steps to obtain the best outcome for clients considering price, cost, speed, and likelihood of execution.

Recordkeeping: retain trade records, communications, and confirmations for the regulatory retention period; audit trails must be reconstructable.

Licensing and registration: dealing, advising, or arranging in FX may require authorization depending on jurisdiction and client type (retail vs professional).

Benchmark integrity: submissions to fixings (e.g., WM/Refinitiv, ECB reference rates) must be based on actual transactions and free from manipulation.

Conflicts of interest: identify, disclose, and manage conflicts; personal account dealing and gifts/entertainment policies apply.

CLS (Continuous Linked Settlement): multilateral payment-versus-payment (PVP) settlement for eligible currencies; reduces Herstatt (settlement) risk.

Herstatt risk: risk that one leg of an FX transaction settles but the counterparty fails before the other leg settles; mitigated by PVP and netting.

SWIFT MT300 (confirmation), MT202 (general financial institution transfer), and ISO 20022 (pacs.008, camt.053) are standard messaging formats.

Confirmation must include trade date, value date, currency pair, amounts, rate, settlement instructions, and counterparty identifiers; matched confirmations reduce disputes.

Bilateral netting and payment netting reduce the number of payments and settlement exposure; close-out netting governs default.

SSI (standing settlement instructions): verified account details for each currency; changes require call-back verification to prevent fraud.

Trade lifecycle: execution, confirmation/affirmation, clearing (where applicable), settlement, and reconciliation; breaks must be investigated and resolved.

ISDA Master Agreement and Credit Support Annex (CSA) govern derivatives documentation, collateral, and close-out netting between counterparties.