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FX Specialist 1 practice questions

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Question 1Foreign Exchange Market Fundamentals

In the foreign exchange market, which pair is quoted with the US dollar as the base currency by standard market convention?

  1. USD/JPY Correct answer.
  2. AUD/USD
  3. EUR/USD
  4. GBP/USD

Explanation

Standard convention quotes most currencies as units of foreign currency per US dollar, so USD is the base in USD/JPY. The exceptions are EUR, GBP, AUD, NZD and a few others, which are quoted against the dollar with the non-dollar currency first.

Question 2Foreign Exchange Market Fundamentals

A dealer quotes EUR/USD as 1.0850/1.0855. What is the bid-ask spread in pips?

  1. 5 pips Correct answer.
  2. 0.5 pips
  3. 50 pips
  4. 0.05 pips

Explanation

For a pair quoted to four decimal places, one pip is 0.0001. The difference between 1.0855 and 1.0850 is 0.0005, which equals five pips.

Question 3Foreign Exchange Market Fundamentals

Which statement best describes a spot FX transaction?

  1. A contract that fixes a rate for a future date but settles only the profit or loss
  2. A purchase of one currency against another with no fixed settlement date
  3. An exchange of currencies for value on the standard settlement date, typically T+2 Correct answer.
  4. An agreement to exchange currencies on a date beyond two business days

Explanation

Spot transactions settle on the standard value date, which for most pairs is two business days after the trade date. The rate is agreed at execution and the full principal amounts are exchanged on that date.

Question 4Foreign Exchange Market Fundamentals

What does a forward FX contract primarily allow a corporate client to do?

  1. Lock in an exchange rate today for settlement on a future date Correct answer.
  2. Eliminate counterparty credit risk entirely
  3. Speculate on intraday price movements with no settlement obligation
  4. Exchange currencies immediately at the interbank mid rate

Explanation

A forward fixes the exchange rate at trade date for value on a specified future date, letting the client hedge known future cash flows. Settlement of the full amounts occurs later, at the agreed rate.

Question 5Foreign Exchange Market Fundamentals

In the expression USD/JPY = 150.00, what is the Japanese yen?

  1. The settlement currency
  2. The quote currency Correct answer.
  3. The base currency
  4. The vehicle currency

Explanation

The currency written second in a pair is the quote (or counter) currency, and its price is expressed per one unit of the base currency. Here one US dollar buys 150 yen, so the yen is the quote currency.

Question 6Foreign Exchange Market Fundamentals

What is a cross-currency pair in FX?

  1. A pair quoted only in the interbank market
  2. A pair with a fixed official exchange rate
  3. A pair of two non-dollar currencies, such as EUR/GBP Correct answer.
  4. Any pair that includes the US dollar

Explanation

A cross pairs two currencies neither of which is the US dollar, for example EUR/GBP or AUD/JPY. Crosses are often priced by triangulating through the dollar.

Question 7Foreign Exchange Market Fundamentals

Which market participant is most likely to quote two-way prices continuously and hold inventory in multiple currencies?

  1. A central bank setting policy rates
  2. A retail investor buying holiday cash
  3. A market-making FX dealer Correct answer.
  4. A corporate treasurer hedging a payable

Explanation

Market makers stand ready to buy and sell on a continuous basis and carry currency inventory to facilitate client and interbank flow. Corporates and retail investors are price takers rather than continuous quoters.

Question 8Foreign Exchange Market Fundamentals

An FX trade is executed on a Monday. Under standard T+2 convention for a major pair, what is the value date, assuming no holidays intervene?

  1. Thursday
  2. Monday
  3. Wednesday Correct answer.
  4. Tuesday

Explanation

T+2 means two business days after the trade date. Counting Tuesday as one day and Wednesday as two gives Wednesday as the value date.

Question 9Foreign Exchange Market Fundamentals

The spot rate for USD/CHF is 0.8800 and the one-year forward is 0.8600. What does this forward quotation indicate?

  1. The forward market expects no change in the spot rate
  2. The Swiss franc trades at a forward premium to the dollar Correct answer.
  3. The quotation is invalid because forwards cannot be below spot
  4. The dollar trades at a forward premium to the Swiss franc

Explanation

A forward rate below spot means fewer Swiss francs per dollar in the future, so the dollar is at a forward discount and the franc at a forward premium. This typically reflects the interest rate differential between the two currencies.

Question 10Foreign Exchange Market Fundamentals

USD/JPY spot is 150.00 and the three-month forward points are quoted as −150. What is the outright three-month forward rate?

  1. 148.50 Correct answer.
  2. 150.15
  3. 135.00
  4. 151.50

Explanation

For USD/JPY, forward points are conventionally expressed in units of the second decimal of the quote, so −150 points means subtract 1.50 from spot. That gives 150.00 − 1.50 = 148.50.

Question 11Foreign Exchange Market Fundamentals

Given EUR/USD = 1.1000 and USD/JPY = 150.00, what is the implied EUR/JPY cross rate?

  1. 136.36
  2. 151.10
  3. 165.00 Correct answer.
  4. 150.00

Explanation

To build EUR/JPY, multiply the two dollar rates because the dollar cancels: 1.1000 × 150.00 = 165.00 yen per euro. This triangulation is how crosses are derived from the dollar legs.

Question 12Foreign Exchange Market Fundamentals

A client wants to buy EUR and sell USD for value today. Which side of the dealer's EUR/USD quote does the client deal on?

  1. The mid, because it is fairest to both parties
  2. Whichever side has the smaller spread
  3. The bid, because the dealer buys euro
  4. The ask, because the dealer sells euro Correct answer.

Explanation

The dealer quotes a bid at which it buys the base currency and an ask at which it sells the base currency. A client buying euro takes the base currency from the dealer, so it deals on the ask.

Question 13Foreign Exchange Market Fundamentals

Which factor most directly widens the bid-ask spread quoted by an FX dealer in a currency pair?

  1. A longer forward tenor chosen by the client
  2. A narrowing of the interest rate differential
  3. A rise in market volatility and reduced liquidity in that pair Correct answer.
  4. An increase in the client's credit rating

Explanation

Dealers widen spreads when uncertainty and inventory risk rise, and thin liquidity makes hedging positions harder. Higher volatility and lower liquidity therefore both push the spread wider.

Question 14Foreign Exchange Market Fundamentals

An exporter expects to receive 1,000,000 USD in three months and wants certainty on the euro amount. Which action hedges the exposure?

  1. Buy EUR/USD spot and hold the dollars
  2. Buy a EUR call option and also sell dollars forward
  3. Buy USD 1,000,000 forward against EUR
  4. Sell USD 1,000,000 forward against EUR Correct answer.

Explanation

The exporter will receive dollars and needs to convert them to euro, so it sells dollars forward against euro to fix the conversion rate. That locks in the euro proceeds regardless of later spot moves.

Question 15Foreign Exchange Market Fundamentals

In an FX swap, what does the counterparty agree to do?

  1. Borrow in one currency and lend in the same currency
  2. Purchase a currency option and simultaneously sell a forward
  3. Exchange currencies at a single future date only
  4. Exchange two currencies spot and reverse the exchange at a later date Correct answer.

Explanation

An FX swap combines a near-date exchange with an offsetting far-date exchange in the same pair. It is used to manage short-term funding and liquidity across currencies without lasting exposure.

Question 16Foreign Exchange Market Fundamentals

A dealer quotes USD/JPY 150.00/150.05 and a client sells USD 1,000,000. How much yen does the client receive?

  1. 150,050,000
  2. 150,000,000 Correct answer.
  3. 149,950,000
  4. 100,000,000

Explanation

The client sells dollars to the dealer, so the dealer buys dollars at its bid of 150.00. Multiplying 1,000,000 by 150.00 gives 150,000,000 yen.

Question 17Foreign Exchange Market Fundamentals

Which statement correctly describes the relationship between interest rates and forward points under covered interest parity?

  1. Forward points equal the spot rate in all cases
  2. The currency with the higher interest rate trades at a forward premium
  3. The currency with the higher interest rate trades at a forward discount Correct answer.
  4. Forward points are independent of interest rate differentials

Explanation

Covered interest parity implies that the currency with the higher interest rate must trade at a forward discount to offset the rate advantage. Otherwise arbitrage could lock in riskless profit.

Question 18Foreign Exchange Market Fundamentals

What is the primary role of CLS in the FX market?

  1. Settling eligible FX transactions through a payment-versus-payment process Correct answer.
  2. Setting official reference exchange rates
  3. Guaranteeing forward points for corporate clients
  4. Providing retail access to spot currency trading

Explanation

CLS settles matched FX instructions using payment-versus-payment, so both currency legs settle together. This reduces settlement risk, often called Herstatt risk, for participating institutions.

Question 19Foreign Exchange Market Fundamentals

A treasurer must choose between a forward and an FX option to hedge a highly uncertain future euro payable. Which consideration favours the option?

  1. The option eliminates the need to pay any upfront cost
  2. The option guarantees a worse rate than the forward
  3. The option removes counterparty risk completely
  4. The option preserves upside if the euro weakens, at the cost of a premium Correct answer.

Explanation

An option gives the right but not the obligation to exchange at a set rate, so the buyer benefits if spot moves favourably. That flexibility is paid for through the premium, unlike a forward which locks the rate with no upfront cost.

Question 20Foreign Exchange Market Fundamentals

In a two-way quote, which component represents the price at which the quoting dealer will sell the base currency?

  1. The bid
  2. The mid
  3. The forward point
  4. The ask Correct answer.

Explanation

The ask, or offer, is the price at which the dealer sells the base currency to the client. The bid is the lower price at which the dealer buys the base currency.

Question 21Foreign Exchange Market Fundamentals

A bank's spot USD/SGD is 1.3400/1.3410 and the one-month forward points are +25/+30. What is the outright one-month forward bid?

  1. 1.3400
  2. 1.3375
  3. 1.3425 Correct answer.
  4. 1.3430

Explanation

Forward points are added to spot when the base currency is at a forward premium. The forward bid equals the spot bid plus the bid-side points: 1.3400 + 0.0025 = 1.3425.

Question 22Foreign Exchange Market Fundamentals

A trader observes EUR/USD at 1.1000 in London, EUR/GBP at 0.8500, and GBP/USD at 1.2900. What does this imply?

  1. The quotes are consistent because all three cross rates agree exactly
  2. The GBP/USD quote must be the erroneous one
  3. No arbitrage is possible without a central bank intervention
  4. A triangular arbitrage opportunity exists because the implied EUR/USD differs from the quoted rate Correct answer.

Explanation

The implied EUR/USD from the crosses is 0.8500 × 1.2900 = 1.0965, which differs from the quoted 1.1000. That discrepancy allows a trader to buy euro cheaply through the cross legs and sell at the higher direct rate for a riskless profit before prices adjust.

Question 23Foreign Exchange Market Fundamentals

An FX swap is quoted for USD/JPY with spot at 150.00 and three-month forward points at −120. A client swaps by selling USD spot and buying USD forward. What net effect does the client achieve?

  1. The client earns forward points because it buys dollars cheaper forward
  2. The client receives the full spot rate on both legs
  3. The client pays forward points because it sells dollars at spot and rebuys at a lower rate Correct answer.
  4. The client pays no points because swaps are always quoted flat

Explanation

The client sells dollars at 150.00 spot and buys them back forward at 148.80, so it gives up 1.20 yen per dollar, equivalent to paying the forward points. This cost reflects the interest rate differential over the period.

Question 24Foreign Exchange Market Fundamentals

A corporate has a USD 5,000,000 payable due in six months and simultaneously a USD 5,000,000 receivable due in six months from the same counterparty timing. What is the most capital-efficient treatment of the FX exposure?

  1. Net the exposures and hedge only the residual amount Correct answer.
  2. Leave both flows unhedged because they offset
  3. Buy a straddle option strategy to cover both legs
  4. Execute two separate forwards, one for each cash flow

Explanation

When payables and receivables in the same currency and timing offset, only the net residual carries FX risk. Hedging the net amount reduces transaction costs and avoids over-hedging.

Question 25Foreign Exchange Market Fundamentals

A dealer quotes a currency pair with a very wide spread during a liquidity shock. Which explanation best fits the change in pricing?

  1. The dealer's inventory risk and adverse selection risk have increased Correct answer.
  2. The base currency has been officially revalued
  3. The interest rate differential has collapsed to zero
  4. The spot value date has shifted to T+0

Explanation

In a liquidity shock, dealers face greater difficulty hedging and higher risk of trading against better-informed counterparties. Widening the spread compensates for that inventory and adverse selection risk.

Question 26Foreign Exchange Market Fundamentals

In the FX market convention for a pair such as EUR/USD, what does the first currency in the pair represent?

  1. The counter currency, which is fixed at one unit
  2. The base currency, which is priced in units of the second currency Correct answer.
  3. The quote currency, which is always the US dollar
  4. The settlement currency used only for the value date

Explanation

FX quotations are structured as base/quote, so EUR/USD means the price of one euro expressed in US dollars. The base currency is the unit being priced, and the second currency (the quote or term currency) expresses that price. This convention determines which side of the quote a client deals on when buying or selling the base currency.

Question 27Foreign Exchange Market Fundamentals

Which currency pair is classified as an emerging-market pair rather than a major or a European cross?

  1. AUD/NZD
  2. USD/ZAR Correct answer.
  3. EUR/GBP
  4. USD/CHF

Explanation

Emerging-market pairs combine a major currency with the currency of a developing economy, and USD/ZAR is a standard example because the South African rand is an EM currency. EUR/GBP is a European cross, USD/CHF is a major, and AUD/NZD is a commodity-linked cross of two developed-market currencies. Classification matters because EM pairs typically carry wider spreads and different liquidity profiles.

Question 28Foreign Exchange Market Fundamentals

A dealer quotes EUR/USD as 1.0850/1.0855, and a corporate client wants to sell EUR 2,000,000 against USD. Which rate applies and how many US dollars does the client receive?

  1. 1.0855, receiving USD 2,170,000
  2. 1.0855, receiving USD 2,171,000
  3. 1.0850, receiving USD 2,171,000
  4. 1.0850, receiving USD 2,170,000 Correct answer.

Explanation

The client sells EUR, so the dealer buys EUR at the bid, which is the lower rate of 1.0850. Multiplying EUR 2,000,000 by 1.0850 gives USD 2,170,000. The offer at 1.0855 applies only when the client buys EUR from the dealer.

Question 29Foreign Exchange Market Fundamentals

Spot USD/JPY is 152.00, and the one-year US dollar interest rate is higher than the one-year yen interest rate. Under covered interest parity, which outcome is expected for the one-year USD/JPY forward?

  1. It trades below 152.00 because the higher-yielding dollar must trade at a forward discount Correct answer.
  2. It stays exactly at 152.00 regardless of the interest-rate differential
  3. It moves above 152.00 only if the yen interest rate rises above the dollar rate
  4. It trades above 152.00 because the higher-yielding dollar must trade at a forward premium

Explanation

Covered interest parity links forward points to the interest-rate differential: when the dollar rate exceeds the yen rate, the dollar trades at a forward discount against the yen. That discount means USD/JPY forward is lower than spot, so the forward trades below 152.00. The forward premium or discount offsets the interest-rate advantage, preventing riskless arbitrage.

Question 30Foreign Exchange Market Fundamentals

A bank quotes spot EUR/USD at 1.0900/1.0905 and three-month forward points at +40/+45. A client buys EUR 1,000,000 three months forward. What outright rate does the client pay, and why are the points positive?

  1. 1.0950, because the euro interest rate is below the dollar rate, so the euro trades at a forward premium Correct answer.
  2. 1.0905, because forward points do not apply when the client buys the base currency
  3. 1.0945, because the client buys at the forward offer side of the points
  4. 1.0940, because the client buys at the forward bid side of the points

Explanation

The client buys EUR forward, so it deals on the forward offer, which is the spot offer plus the offer-side points: 1.0905 + 0.0045 = 1.0950. Positive forward points mean the euro is at a forward premium, which occurs when the euro interest rate is below the dollar rate under covered interest parity. The bid side of the points is only used when the client sells the base currency forward.

Question 31Spot and Forward Transactions

A corporate treasurer will receive EUR 2,000,000 in three months and wants to lock in the exchange rate now. Which transaction fixes the rate at which the euros will be exchanged for US dollars on the value date?

  1. Buy EUR 2,000,000 forward against USD
  2. Buy a EUR call option and sell a USD put option
  3. Enter an FX swap that buys EUR spot and sells EUR forward
  4. Sell EUR 2,000,000 forward against USD Correct answer.

Explanation

A forward sale of the receivable currency fixes the rate at which the treasurer will deliver euros and receive dollars on the maturity date, eliminating downside FX risk. Buying euros forward would add to the long euro exposure rather than hedge it. An FX swap only shifts the timing of the exposure and does not lock the outright rate.

Question 32Spot and Forward Transactions

In a standard spot FX transaction, what is the conventional value date for a pair such as USD/JPY traded on a Tuesday, assuming no holidays intervene?

  1. Tuesday, the trade date
  2. Wednesday, one business day later
  3. Thursday, two business days later Correct answer.
  4. Friday, three business days later

Explanation

Spot FX conventionally settles T+2, meaning two business days after the trade date. A Tuesday trade therefore values on Thursday provided both currencies have normal business days. T+0 and T+1 settlement exist only as special arrangements such as same-day or tom-next deals.

Question 33Spot and Forward Transactions

A dealer quotes EUR/USD as 1.0850 / 1.0855. A client wants to buy euros. At which rate does the trade execute and what does the spread represent?

  1. 1.0850, the offer, because the lower number is the selling price
  2. 1.0850, the bid, which is the price at which the dealer buys euros
  3. 1.0855, the offer, which is the price at which the dealer sells euros Correct answer.
  4. 1.08525, the midpoint, because clients always trade at mid

Explanation

The client buys at the dealer's offer (ask), the higher of the two prices, which is 1.0855. The dealer buys base currency at the bid and sells it at the offer, so the spread compensates the dealer for risk and processing. Clients trade at mid only under specific arrangements, not in a standard two-way quote.

Question 34Spot and Forward Transactions

Which statement correctly describes the relationship between spot and forward rates when the base currency interest rate is higher than the quote currency interest rate, all else equal?

  1. The forward rate for the base currency is at a premium to spot
  2. The forward rate for the base currency is at a discount to spot Correct answer.
  3. The forward rate is at a discount only if the base currency is expected to appreciate
  4. The forward rate equals spot regardless of interest rates

Explanation

Covered interest parity implies that the currency with the higher interest rate trades at a forward discount, because the forward rate offsets the interest advantage. If the base currency yields more, its forward price is below spot. Expectations about future spot rates do not determine the forward points.

Question 35Spot and Forward Transactions

A company sells USD 5,000,000 forward for 90 days at a rate of 1.2500 against CHF, while spot at trade date is 1.2400. What does the 0.0100 difference represent?

  1. A forecast that the USD will strengthen over 90 days
  2. An option premium embedded in the forward contract
  3. A credit charge levied by the dealer on the corporate client
  4. A forward premium on the USD reflecting lower USD interest rates Correct answer.

Explanation

The difference between the forward rate and spot is the forward points, driven by the interest rate differential between the two currencies. A positive adjustment for the base currency is a forward premium and typically reflects lower interest rates on that currency. Forward points are not a credit fee, an option premium, or a market forecast.

Question 36Spot and Forward Transactions

Which counterparty arrangement allows a corporate client to draw on a pre-agreed forward FX line without settling each individual trade at inception?

  1. A retail margin account with daily mark-to-market calls
  2. A spot transaction settled on T+2
  3. A forward contract under an ISDA master agreement with a credit support annex Correct answer.
  4. A non-deliverable forward settled in a single currency

Explanation

Documentation under an ISDA master agreement, often with a credit support annex, lets counterparties net exposures and post collateral rather than settling each trade up front. This framework supports credit lines for forward dealing. Spot deals do not create deferred settlement obligations, and NDFs are a settlement style rather than the credit framework itself.

Question 37Spot and Forward Transactions

A treasurer must pay JPY 100,000,000 in six months and wants protection against JPY appreciation while retaining the ability to benefit if JPY weakens. Which instrument fits this objective?

  1. Enter a spot purchase of JPY today
  2. Sell a JPY forward outright
  3. Buy a JPY put option against the funding currency
  4. Buy a JPY call option against the funding currency Correct answer.

Explanation

A call option on JPY gives the right to buy yen at a set strike, capping the cost if yen strengthens while allowing the treasurer to use the market if yen weakens. A forward locks the rate in both directions and removes the upside. A put would protect a yen seller, not a yen buyer.

Question 38Spot and Forward Transactions

A bank quotes a forward margin for a broken date of 45 days. Which convention is most commonly used to interpolate the rate from the 1-month and 2-month points?

  1. Simple linear interpolation between the two standard tenors Correct answer.
  2. Use of the spot rate adjusted by the overnight rate
  3. Use of the 1-month point only, ignoring the second tenor
  4. Rounding to the nearest standard tenor without interpolation

Explanation

For broken or odd dates, dealers interpolate linearly between the two nearest standard forward points, weighted by the number of days. This gives a rate consistent with the surrounding market. Ignoring one tenor or rounding to a standard date would misprice the exposure.

Question 39Spot and Forward Transactions

Which statement about non-deliverable forwards (NDFs) is correct?

  1. NDFs are settled in a convertible currency based on a fixing rate Correct answer.
  2. NDFs can only be traded on exchanges
  3. NDFs eliminate counterparty credit risk entirely
  4. NDFs require physical delivery of the restricted currency on maturity

Explanation

An NDF references a restricted or non-convertible currency but settles the difference in a freely convertible currency, usually against an official fixing. No principal is exchanged in the restricted currency. NDFs remain over-the-counter instruments and carry counterparty credit risk like any bilateral derivative.

Question 40Spot and Forward Transactions

A dealer quotes a forward outright of 1.3450 for USD/SGD while spot is 1.3400 and the 3-month points are 50. A client asks for the all-in rate on a 3-month forward purchase of USD. What is the correct all-in rate?

  1. 1.3450 Correct answer.
  2. 1.3350
  3. 1.3500
  4. 1.3400

Explanation

The forward outright already equals spot plus the forward points, so the all-in rate for a 3-month forward is 1.3450. Adding the points again would double count them. The spot rate alone applies only to a T+2 transaction.

Question 41Spot and Forward Transactions

Which factor most directly determines the size of forward points between two currencies for a given tenor?

  1. The trading volume in the spot market
  2. The credit rating of the corporate client
  3. The interest rate differential between the two currencies Correct answer.
  4. The central bank's foreign exchange reserves

Explanation

Forward points reflect the interest rate differential between the two currencies over the tenor, consistent with covered interest parity. Spot market volume, client credit standing, and reserve levels do not set the forward margin. Credit standing may affect the dealer's spread but not the underlying points.

Question 42Spot and Forward Transactions

A company has a EUR 1,000,000 payable in two months and simultaneously a EUR 1,000,000 receivable in four months. Which approach most efficiently manages the timing mismatch?

  1. Do nothing because the amounts offset in euros
  2. Buy EUR 1,000,000 spot and hold it for four months
  3. Enter a two-month forward purchase and a four-month forward sale of EUR 1,000,000 Correct answer.
  4. Buy a four-month EUR call and sell a two-month EUR put

Explanation

Matching the payable with a two-month forward purchase and the receivable with a four-month forward sale hedges each cash flow at its own value date. Simply netting the euro amounts ignores the two-month gap during which the company is exposed. Holding spot euros ties up cash and creates funding and custody costs.

Question 43Spot and Forward Transactions

A forward contract is agreed at a rate of 1.1000 for EUR/USD. On maturity the prevailing spot is 1.1200. For the party that bought EUR forward, what is the economic outcome relative to dealing at spot on maturity?

  1. A loss of 0.0200 USD per EUR versus the spot alternative
  2. No difference because the forward must be settled at spot
  3. A gain of 0.0200 USD per EUR versus the spot alternative Correct answer.
  4. A gain only if the contract is cash settled rather than delivered

Explanation

The forward buyer pays 1.1000 per euro while the market on maturity is 1.1200, so buying via the forward is 0.0200 USD per euro cheaper than buying at spot. This is an economic gain regardless of whether the contract is physically delivered or cash settled. The forward rate is fixed at inception and does not reset to spot.

Question 44Spot and Forward Transactions

Which statement best explains why a forward rate for a currency pair can differ from the market's expected future spot rate?

  1. Forward rates are determined by interest rate parity and include a risk premium Correct answer.
  2. Forward rates are set by the largest market maker each day
  3. Forward rates are set by central banks to guide expectations
  4. Forward rates always equal the expected future spot rate by definition

Explanation

Forward rates are anchored by covered interest parity, which links them to spot and the interest rate differential, and they may also embed a risk premium. As a result they need not equal the market's expectation of the future spot rate. Central banks and individual market makers do not set forward rates.

Question 45Spot and Forward Transactions

A corporate client asks for a forward rate on a currency pair where the value date falls on a public holiday in the quote currency's country but is a business day in the base currency's country. What is the standard market practice?

  1. Settle one day before the holiday in both currencies
  2. Roll the value date forward to the next joint business day Correct answer.
  3. Cancel the trade and rebook at spot
  4. Settle on the holiday because only the base currency matters

Explanation

When a value date is not a business day in both currency centers, the standard convention is to move to the next day that is a business day in both. This avoids settlement failure in one leg. Settling on a holiday or moving earlier is not the market convention.

Question 46Spot and Forward Transactions

A bank's client wants to buy USD 10,000,000 against JPY for value tomorrow. Which market convention describes this transaction?

  1. Cash
  2. Spot
  3. Forward outright
  4. Tom-next Correct answer.

Explanation

A value date of one business day after the trade date is called tom (tomorrow), and a tom-next swap rolls value from tomorrow to the next day. A cash deal settles same day, and spot settles T+2. A forward outright has a value date beyond the spot date.

Question 47Spot and Forward Transactions

A company wants to hedge a future foreign currency payment but is unsure of the exact amount because the underlying order may change. Which approach best addresses this uncertainty?

  1. Hedge a portion with forwards and use options for the remainder Correct answer.
  2. Hedge with an NDF regardless of currency convertibility
  3. Wait until the payment date and transact at spot
  4. Hedge the full estimated amount with a deliverable forward

Explanation

Combining forwards for the committed portion with options for the uncertain portion balances cost and flexibility. Over-hedging with a full deliverable forward creates an open position if the order shrinks. Waiting until the payment date leaves the company fully exposed to spot moves.

Question 48Spot and Forward Transactions

Which statement about the settlement of a deliverable forward is correct?

  1. The full principal amounts are exchanged on the value date Correct answer.
  2. Only the net difference is exchanged in the base currency
  3. Settlement occurs at the trade date
  4. The contract is always cash settled in the quote currency

Explanation

A deliverable forward involves exchanging the full notional amounts of both currencies on the agreed value date. Cash-settled or net-settled structures are distinct from deliverable forwards. Settlement timing is the forward value date, not the trade date.

Question 49Spot and Forward Transactions

A dealer quotes a 6-month forward for USD/CHF with points of -120 when spot is 0.9000. What is the forward outright and what does the sign indicate?

  1. 0.9000, indicating no interest rate differential
  2. 0.8880, indicating a CHF forward discount
  3. 0.9120, indicating a USD forward premium
  4. 0.8880, indicating a USD forward discount Correct answer.

Explanation

Negative points are subtracted from spot, giving 0.8880, and a lower forward rate means the base currency (USD) trades at a forward discount. This typically reflects lower USD interest rates relative to CHF. A forward premium would require positive points added to spot.

Question 50Spot and Forward Transactions

Which risk does a corporate face when it hedges a foreign currency payable with a forward but the underlying supplier invoice is later cancelled?

  1. The hedge is transferred to the supplier at no cost
  2. The forward becomes void automatically when the invoice is cancelled
  3. The dealer must refund all forward points
  4. The company is left with an open forward position that must be closed out Correct answer.

Explanation

A forward is a binding obligation independent of the commercial contract, so cancelling the invoice leaves the company with an open position. It must close the forward in the market, potentially at a gain or loss. The contract does not void automatically and the dealer has no obligation to refund points.