Foreign Exchange
The deepest market in the world: exchanging one currency for another, today or at a date in the future.
This marketWhat it is, what trades, and the ideas it runs on.
The market at a glance
Foreign exchange is the deepest market humanity has built: more changes hands in a day than in any other market, running 24 hours from Wellington's open to New York's close, with no central exchange — just a global dealer network stitched together by arbitrage. The dollar stands on one side of ~88% of all trades; EUR/USD alone is the most traded instrument on the planet.
Every cross-border activity ends here: trade invoicing, investment hedging, tourism, central-bank reserves, and speculation layered on top. The professional core is concentrated — a handful of bank dealers and non-bank market makers intermediate most flow, increasingly by internalising it (netting clients against each other) before touching public venues.
The one law of FX pricing
Covered interest parity: a forward exchange rate is not a forecast — it is spot adjusted for the two currencies' interest gap, enforced by arbitrage. High-rate currencies trade at forward discounts; low-rate at premiums. This single relation prices forwards, FX swaps and the funding structure of global finance:
What the symbols mean
- Fthe forward or futures price
- Sthe price of the underlying today
- rthe interest rate, per year
- tautime remaining, in years
Interactive: forward rate & swap points (CIP)Medium
Compute the arbitrage-enforced forward for any pair from spot and the two interest rates.
- Forward rate
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- Forward points (pips)
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- Annualised carry
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Textbook CIP. In reality a cross-currency basis — the price of dollar balance sheet — shifts this by a few to dozens of basis points; see the FX swap page for why.
How the products fit together
Spot is the raw exchange. Forwards lock future rates for hedgers; NDFs do the same for restricted currencies, cash-settled offshore. FX swaps — over half of all FX volume — are really collateralised currency loans, the global dollar-funding machine. Cross-currency swaps extend that to multi-year debt transformation, letting issuers borrow wherever it's cheap and swap home.
Concepts to master
- Every position is a pair — you're never just "long euro"; you're long euro against something, funding included.
- Carry and its crashes — high-yield currencies don't depreciate as parity theory predicts (the forward-premium puzzle), rewarding carry trades that periodically unwind violently. "Up the stairs, down the elevator" is this market's oldest scar.
- The dollar smile — the dollar strengthens both in US booms and global panics; only the boring middle weakens it. Half of macro trading is a position on this smile.
- The basis is a stress gauge — when covered parity breaks against the dollar, someone's funding is on fire; central-bank swap lines exist for exactly that moment.
Interactive: carry trade arithmeticMedium
Borrow the low-yielding currency, park in the high-yielding one, collect the difference — until the exchange rate takes it back. The numbers first:
- Rate differential
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- Carry on equity p.a.
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- Carry in dollars
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- Breakeven depreciation p.a.
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Uncovered carry: the differential is yours only if the target currency doesn't fall by more than it. History's verdict: it usually doesn't — and occasionally it does, all at once.
Interactive: currency-hedged yieldMedium
A foreign bond's headline yield is not what a hedged investor earns. Subtract the hedge cost — the rate differential plus the cross-currency basis — and compare honestly.
- Annual hedge cost
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- Hedged yield
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- Pick-up vs. domestic
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- Verdict
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This single calculation drives cross-border bond flows: when hedging costs exceed the yield advantage, Japanese and European institutions stop buying US bonds — and the flow reverses. See basis swaps for why that last input exists.
The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.
The units this market speaks in
- Every price is a ratio, so there is no such thing as an absolute move. EUR/USD is how many dollars for one euro: the first currency is the base, the second is what you pay in. "The euro fell" is always against something.
- A pip is the fourth decimal place for most pairs and the second for yen pairs. The "big figure" is everything to the left of it, and it is dropped in conversation because both sides already know it.
- Size is in millions of the base currency. "Five euro-dollar" is five million euros, not five million dollars. A "yard" is a billion.
- Forwards are quoted as points added to spot, not as an outright rate, because the points are arithmetic on two interest rates rather than a view. FX forward.
- Cross rates must be consistent or somebody arbitrages them: EUR/USD times USD/JPY is EUR/JPY, and if it is not, one of the three is about to move.
- Settlement is in two currencies, in two countries, on two holiday calendars. This is a genuine source of failed settlements and it appears in no textbook formula.
Who is choosing, and who is forced
Most of the volume in this market has nothing to do with a view on a currency. It is a by-product of somebody doing business or hedging something else, which is why flow analysis matters here more than opinion.
- Forced: exporters and importers with a hedging policy. The policy says what share of the next twelve months is hedged, and the treasurer executes it whether or not the rate looks good. The treasury seat.
- Forced, monthly: hedged share classes. A fund that promises a currency-hedged version must roll that hedge on a schedule, and the size depends on how the underlying performed — so a strong month mechanically increases the hedge.
- Forced: index rebalancing across currencies, on a published date, in the same direction for everybody tracking it.
- Forced by policy: central banks defending a level — until they stop, which is the single most instructive event in this market. The Swiss franc, 2015.
- Choosing: macro funds and dealers, who intermediate all of the above and are compensated for holding the position between the two sides arriving.
What a bad day looks like here
- The shape of it: a currency that has been quiet for years because a policy held it there, and then the policy stops. There is no gradual version of this.
- The first tell: the cost of protection rising while spot does not move. Somebody is paying for an outcome the spot market says is impossible.
- The second tell: the forward points moving for funding reasons rather than rate reasons. In a dollar squeeze, the cross-currency basis widens before anything else does. Cross-currency swap.
- The mechanical part: stop orders clustered just beyond a level that has held. When it goes, the orders are the second half of the move.
- Where it has happened: January 2015, and across a region in 1997.
How a trade actually happens here
Foreign exchange has no exchange. No central book, no clearing house for spot, no closing price everybody agrees on — and it still settles more reliably than markets that have all three, because of one piece of plumbing.
- Agreeing it — a two-way price, good for a size and a moment. The quote is a bid and an offer in one breath, live for as long as the maker says it is. Accepting it is the whole trade; there is nothing else to agree. FX spot.
- What was agreed is two payments, not one. Buying euros against dollars means paying dollars into one country's payment system and receiving euros in another's — same day, different time zones, different banks.
- Settling it — the second business day for most pairs, the next day for a few. The convention belongs to the currency pair, not to the trader, and getting it wrong is a funding problem rather than a market one.
- The gap between the two payments has a name and a fix. Paying out before receiving means a counterparty that fails in the hours between leaves you with the payment made and nothing coming back. The fix is payment versus payment: a settlement system that releases both legs together or neither, so the exposure never exists at all.
- What settles outside that system settles gross, one payment at a time, and the old risk comes back with it. This is why an operations team cares a great deal which currencies a desk has started trading.
- When it fails: a payment goes to a wrong account, or arrives after the cut-off of that currency's payment system. The cost is a day's interest in a currency you did not plan to be short of, and the day is not always one day.
Where the spread is, and who earns it
There is no commission line on most currency transactions, and no exchange publishing one price. Everything the transaction costs is inside the rate, and the whole skill of reading this market is getting it back out.
- The spread, in pips. Tight between banks in a major pair during the hours when three centres overlap; a multiple of that in a thin pair, in size, or at four in the morning. The same trade has several honest prices depending on when it is done. Market microstructure.
- The forward points are not a forecast. They are the interest differential between the two currencies, which is arithmetic rather than a view. A margin can be added to them and is not visible as a separate number. FX forwards.
- "No commission" means the margin is in the rate. A conversion advertised as free is priced against a rate the customer cannot see, and the gap to the interbank mid is the fee. It is disclosed by being subtractable, not by being stated.
- Trading at a fixing is a service with a price. Asking for the published benchmark rate hands the risk of that window to the dealer, who charges for taking it. The alternative is accepting a rate at a moment of your own choosing and owning the difference.
- The overnight roll. A spot position held past its value date is closed and reopened at a new one. That is a forward, priced with its own points and its own margin, every single night. FX swaps.
How a position here ends
Currency is the one asset class where the ordinary ending — actually receiving the thing — is what most participants are trying to avoid.
- Delivery. One currency arrives, the other leaves, on the value date. What a corporate wanted all along and what a trader spends effort not doing.
- Rolling it forward. Delivery is deferred by closing and reopening. The interest differential is charged or credited each time, which turns a view on a rate into a position that also has a carry.
- Netting. Two opposite trades in the same pair for the same date settle as one payment of the difference. It is why a bank with an enormous turnover moves a comparatively small amount of money. Clearing and settlement.
- A stop fills through the level. The ending you specified, at a price you did not: an order says at what level to leave, not at what price. In a gap those are different numbers, and the difference is largest exactly when the order matters most.
- The rate is changed rather than traded. A peg is abandoned, a band is widened, a floor is removed. Nothing traded to get there; a decision was announced and the market reopened somewhere else. January 2015.
- Settlement fails on one leg. You paid your currency and did not receive theirs. It is the one risk in this market that is about the plumbing rather than the price, and it is why the payment-versus-payment mechanism exists.
Which risk decides across this class
Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?
Which of the five decides what, across these 7
Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.
- Market6 of 7The price of the thing moves.Decides: Cross-Currency Swap, Dual Currency Deposit, FX Forward, FX Future, FX Spot, Non-Deliverable Forward. Matters on 1 more.
- Credit1 of 7Somebody who owes you does not pay.Decides: Cross-Currency Swap. Matters on 4 more.
- Liquidity0 of 7You cannot get out at anything near the marked price.Decides: none of them. Matters on 3 more.
- Funding1 of 7Cash is needed before the position pays off — margin, calls, rolls.Decides: FX Future. Matters on 1 more.
- Operational3 of 7The failure is in documents, systems, keys or people, not in prices.Decides: FX Spot, FX Swap, Non-Deliverable Forward. Matters on 2 more.
Market decides 6 of the 7 — which is what makes this a class rather than a list: the instruments differ in shape and fail the same way. Credit decides exactly one of them, Cross-Currency Swap, which is the reason to read that page rather than assume it behaves like its neighbours. Liquidity decides nothing here — which is not the same as being absent.
Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.
Go deeper
Deep diveCarry: up the escalator, down the elevator
The carry trade has beaten textbook theory over most long samples — with a return shape that explains why: steady gains, brutal unwinds.
Point at a line to read what it is doing.
How do I read this chart?
Time across, cumulative profit and loss up. The line is the whole argument about carry trades: many small gains and one large loss are not the same distribution as a steady return, however similar the average looks.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- Theory says it shouldn't work (uncovered interest parity); practice says it mostly has — until it very suddenly hasn't.
- The unwinds cluster with vol spikes: everyone exits the same crowded trade at once.
- Funding currencies soar in crises — yen 2008 and August 2024 doubled the pain exactly when risk assets fell.
- The calculator above shows the arithmetic; this chart shows the distribution it hides: negatively skewed, crash-prone, correlated when it matters.
Deep diveExchange rates: anchored, but on a long rope
Purchasing-power parity works — on a timescale useless for trading. Currencies swing 20–40% around fair value in multi-year cycles.
Point at a line to read what it is doing.
How do I read this chart?
Years across, the exchange rate up. Two lines: where the rate went, and where a long-run theory says it belongs. The distance between them is the honest answer to how useful that theory is over a horizon anybody actually trades.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- Months: rate differentials and risk appetite drive currencies (hence carry).
- Decades: PPP wins — long-run "forecasts" cluster near it.
- Corporates: hedge cash flows, not opinions.
- Investors: unhedged foreign assets carry a second, largely unrewarded bet on top of the first.
Deep diveHow the FX market actually runs
There is no FX exchange — everything trades through a decentralised dealer network, around the clock, with liquidity following the sun.
- Deep end: London afternoon overlapping New York. Puddle: late NY afternoon — where flash crashes live (the 2019 yen move took 7 minutes on holiday-thinned books).
- CLS settlement: both legs exchange simultaneously (payment-versus-payment), killing Herstatt risk — trades outside it (many EM pairs) still price the old danger.
- The 4pm London fix is the benchmark funds reference — site of the 2013 rigging scandal, now surveilled.
- Conventions are tribal: EUR/USD 1.10 = 1 euro costs $1.10; pips are the 4th decimal (2nd for yen); reading a quote backwards is the classic rookie loss.
Deep diveMilestones: five decades of floating
The FX market as we know it is younger than it looks:
- 1944–71 — Bretton Woods: fixed rates, until Nixon closes the gold window and the system dissolves.
- 1973 — floating begins; so does the modern FX market.
- 1974 — Herstatt fails mid-settlement: the risk that eventually creates CLS (2002).
- 1985/87 — Plaza and Louvre Accords: coordinated intervention's high-water mark.
- 1992 — Black Wednesday: Soros vs. the Bank of England; sterling leaves the ERM.
- 1997–98 — Asian crisis: pegged currencies break in sequence; reserves doctrine changes forever.
- 1999 — the euro merges eleven currencies — the largest monetary event since Bretton Woods.
- 2015 — the SNB abandons the franc floor: 30% in minutes, brokers bankrupted, "pegs break" relearned.
- 2010s–now — electronification: algos and platforms carry most flow; flash crashes (2016 GBP, 2019 JPY) are the new failure mode.
Interactive: position sizing from riskMedium
The professional habit that separates survivors from statistics: size the position from the risk, never the other way round.
- Money at risk
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- Position size
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- Notional
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- Effective leverage
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Size = risk ÷ (stop × pip value). Note what the formula does: a tighter stop permits a larger position for the same risk — and a stop is not a guarantee; gaps fill worse than triggers (see the flash-crash fold above).
Deep diveWho runs this market
- The dealer banks: a handful of institutions — JPMorgan, UBS, Deutsche Bank, Citi, State Street among them — intermediate most global volume. There is no exchange to overrule them.
- Primary venues: EBS and LSEG Matching for interbank majors, plus the banks' own single-dealer platforms and multi-dealer venues (360T, FXall, Hotspot).
- CLS: settles both legs of a trade simultaneously for the major currencies, eliminating the risk that ended Herstatt Bank in 1974.
- Central banks: participants, not just supervisors — intervention, reserve management and swap lines all move this market directly.
- The Global FX Code: a voluntary conduct standard written after the fixing scandals; adherence statements are public and reputationally binding.
- Where the data lives: the BIS Triennial Survey is the authoritative measure of market size; central banks publish reserves and intervention data; the CFTC's weekly positioning report is the only public positioning gauge in FX.
Deep diveNumbers & conventions worth memorising
| Item | Convention |
|---|---|
| Market size | The largest market on earth by turnover; the BIS measures it every three years in its Triennial Survey |
| Quoting | Base/quote: EUR/USD 1.1000 means one euro costs 1.10 dollars |
| Pip | The fourth decimal for most pairs; the second decimal for yen crosses |
| Spot settlement | T+2 for most pairs; T+1 for USD/CAD |
| Session depth | Deepest in the London afternoon overlapping New York; thinnest after the New York close — where flash crashes live |
| The fix | The 4pm London benchmark, calculated over a window and used by funds and corporates worldwide |
| Forwards | Quoted in points added to or subtracted from spot, not as outright rates |
The discipline that matters more than any forecast: hedge cash flows on their own timetable. Currency views change weekly; an invoice's due date does not.
How this market works
DriversWhat moves prices here
What actually moves a price here on an ordinary day, and where to look for each one. Ordered roughly by how often it is the answer — not by how interesting it is.
| Driver | Which way it pushes | What to watch |
|---|---|---|
| Interest-rate differentials | Money moves toward the higher yield until it does not | The carry trade in one line — and the reason the crash is always sharper than the accumulation. |
| Terms of trade | A commodity exporter's currency moves with what it exports | For several currencies the fastest read is a commodity price, not a domestic data release. |
| Central bank intervention and regime | A managed rate is flat until it is not | The volatility of a peg does not disappear while it holds; it accumulates. |
| Positioning | It is a zero-sum market, so somebody is always the other side | Crowded carry positions unwind together, which turns a small shock into a large move. |
| Cross-border flow | Trade, hedging and portfolio flows all clear here | Much of the daily volume is somebody hedging an exposure, not expressing a view. |
| The dollar as a global funding currency | In stress everything is a dollar shortage | A crisis anywhere raises demand for dollars, which is why the dollar rises in bad news about the United States too. |
CalendarThe calendar this market keeps
Every market has a rhythm its regulars plan around and a newcomer discovers by being surprised. These are structural — they recur because of how the market is built, not because of anything happening this year.
| When | What happens | Why it matters |
|---|---|---|
| Daily, on the hour | Fixing windows | Benchmark rates are set in a short window, so hedging flow concentrates there and prices move around it. |
| Monthly | Inflation and labour releases | The two prints that most reliably move a currency pair, because they move the rate differential. |
| Six to eight times a year | Policy meetings | In both currencies of the pair — this market always has two central banks. |
| Month end | Rebalancing flows | Funds hedging foreign holdings adjust on a known day, and the flow is mechanical. |
| Quarter end | Balance-sheet dates | FX-swap pricing distorts predictably as banks report. |
ConnectionsHow this market reaches the rest of the atlas
No asset class is a room with the door shut. A move here shows up there, through something specific — and knowing the route is most of knowing why a market you do not follow just moved the one you do.
- Money Markets — An FX swap is a secured money-market trade in disguise, and in stress it is where the dollar shortage shows up first.
- Commodities — Nearly everything is priced in dollars, so the currency moves the price without the supply changing.
- FX Derivatives — The options market on exactly these pairs, where the fear about direction is quoted.
- Fixed Income — Hedged foreign bond buying links two curves and a currency into one decision.
Analysis
AnalysisThe analyst's checklist
- What exposure exists already? Most FX decisions are about a position you did not choose — foreign revenue, foreign assets, a foreign invoice.
- What do the forwards already say? The rate differential is priced; your view has to differ from the forward, not from spot.
- What regime is this currency in? Free-floating, managed, or pegged — the third looks stable right up until it does not.
- Is the trade crowded? The weekly futures positioning report is the only public gauge; extremes precede unwinds.
- What is on the calendar? Central-bank meetings, elections and the month-end fix move currencies more than fundamentals do intraday.
- Can I survive the path? Being right after a 10% adverse move only matters if the position still exists.
AnalysisRed flags
- Getting the quote direction backwards — every FX career includes this once; make it a small once.
- Treating carry as income: it is compensation for a rare, violent loss, and it prices like one.
- Pegs described as stable — the Swiss franc floor held for three years and then moved 30% in minutes.
- Unhedged foreign assets as an accidental currency bet layered on the investment thesis.
- Trading the thin session: liquidity after the New York close is where flash crashes happen.
- Emerging-market yields that look irresistible — check whether the currency is convertible before admiring the carry.
Cross rates and the triangle
Any two currencies quoted against a common third imply a rate between themselves. If the directly quoted cross differs from the implied one, the three legs can be traded round in a circle:
Interactive: implied cross rate and triangular arbitrageEasy
- Implied cross
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- Quoted cross
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- Gap
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- Gross on $1m
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- Reading
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In liquid majors this arbitrage was closed by machines decades ago and any visible gap is inside the spread you would actually pay — run it through the trading-cost calculator before believing it. Its lasting use is as a consistency check: a cross that will not reconcile with its two legs is usually a stale or mis-keyed quote.
Market mapWho is on the other side of your trade
Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.
- Corporates hedging trade flows are the only participants with a genuine underlying need. They are price-takers on timing and the reason the market exists.
- Central banks manage reserves and occasionally intervene. Their size makes them the one participant that can move a major pair by decision rather than by flow.
- Real-money asset managers hedging foreign bond and equity holdings generate large, calendar-driven flows around month-end rebalancing.
- Algorithmic market makers supply most of the visible liquidity and withdraw it in seconds when volatility spikes — which is why FX gaps rather than slides.
- Speculators are a smaller share than folklore suggests, and concentrated in the carry trade, whose crowding is measurable and whose unwind is violent.
Costly mistakesThe five mistakes that cost the most here
Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.
- Reading the quote backwards. The first currency is the base. Getting this wrong is the most common error in FX and it inverts every conclusion.
- Chasing the interest differential. Covered interest parity says the forward already reflects it. What is left is an uncompensated bet on the spot rate — see the carry tool.
- Leaving a foreign holding unhedged by default. Not hedging is a position, taken by omission. Decide it explicitly.
- Assuming a peg is a fact. A managed rate is a policy that can end in one minute, as 2015 demonstrated. Suppressed volatility is stored volatility.
- Underestimating the conversion spread. On a retail platform the FX charge is frequently the largest single fee paid and the least itemised.
What an interview asks here
FX questions test whether you can read a quote correctly under pressure and whether you know that a forward is arithmetic rather than a forecast.
Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.
Q1EUR/USD is 1.10. What does that mean, and which way is up?
What it is checking. The rookie error that costs real money, tested deliberately early.
A complete answer contains:
- One euro costs 1.10 US dollars. The first currency is the base, the second is the quote.
- A rise in the number means the euro strengthened against the dollar.
- Buying EUR/USD means buying euros and selling dollars.
- A pip is the fourth decimal in most pairs and the second in yen pairs, which is a convention rather than a rule of nature.
- Reading a quote backwards is the classic rookie loss, and the way to avoid it is to say the sentence out loud every time.
Q2Is a forward rate a forecast?
What it is checking. The single most useful FX concept, and the answer is a flat no with a reason.
A complete answer contains:
- No. It is spot adjusted for the interest rate difference between the two currencies, enforced by arbitrage.
- If it were anything else, borrowing in one currency, lending in the other and locking the exchange back would leave a gap that somebody would close — so it does not persist.
- So a high-interest currency trades at a forward discount, and a low-interest one at a premium.
- The forward is where the market is indifferent, not where it expects spot to be.
- Which is exactly why the carry trade exists: it is a bet that spot does not move to the forward.
Read it properly: Covered interest parity · FX forward
Q3Explain the carry trade and its risk in one breath.
What it is checking. Because the return shape is the answer, not the return.
A complete answer contains:
- Borrow the low-yielding currency, hold the high-yielding one, and collect the differential.
- Uncovered interest parity says the high-yielding currency should depreciate by exactly that differential. Historically it mostly has not.
- So the trade has usually worked, with a return shape that is steady accrual punctuated by sudden large losses.
- The losses cluster with volatility spikes, because everybody exits the same crowded position at once.
- And the funding currency typically strengthens in a crisis, so the exchange rate loss and the risk-asset loss arrive together.
Read it properly: The carry calculator · FX forward
Q4What is settlement risk in FX and how was it addressed?
What it is checking. A plumbing question, and the historical answer is precise.
A complete answer contains:
- The two legs of an FX trade settle in two different countries in two different time zones, so one side can pay before the other does.
- If the counterparty fails in between, the payer has delivered and received nothing — the full principal, not a mark-to-market.
- It is named after a 1974 German bank failure that happened exactly that way.
- CLS addressed it by settling both legs simultaneously — payment versus payment — so neither moves unless both do.
- Trades outside it, including many emerging-market pairs, still carry the original risk.
Read it properly: Herstatt, 1974 · Clearing and settlement
Q5Should an equity investor hedge currency exposure?
What it is checking. A judgement question where the honest answer distinguishes bonds from equities.
A complete answer contains:
- For a bond portfolio the case is strong: currency volatility is large relative to the return, so hedging removes noise without removing much expected return.
- For equities it is genuinely open. Currency volatility is smaller relative to equity volatility, and the two are sometimes negatively correlated.
- Hedging costs the interest differential, which can be substantial and is not always visible in a fund's headline fee.
- It also introduces cash flow: a hedge that moves against you requires margin, on a portfolio whose assets are not liquid on that timescale.
- So the answer is a framework rather than a rule, and saying that is the correct answer.
Read it properly: Hedged vs. unhedged · The hedged-yield calculator
Q6Why does the cross-currency basis exist if covered parity is an arbitrage?
What it is checking. A stress-gauge question, and it separates the textbook from the market.
A complete answer contains:
- Because the arbitrage requires a balance sheet, and after the crisis balance sheet is a constrained and priced resource.
- So banks demand compensation for putting it to work, and the parity relationship holds only up to that cost.
- The basis widens when dollar funding is scarce, which makes it a real-time gauge of funding stress rather than a mispricing.
- Central bank swap lines exist precisely for the moment it widens dangerously.
- It also has a quarter-end pattern, because balance sheet is measured on reporting dates.
Read it properly: FX · Cross-currency swap
Q7What is an FX swap and what is it actually used for?
What it is checking. It is the largest instrument in the market by turnover and most candidates have never described one.
A complete answer contains:
- A spot exchange of two currencies with a simultaneous agreement to reverse it at a forward date and rate.
- Economically it is a collateralised loan in one currency against another — funding, not a directional position.
- Which is why it is used to roll hedges, manage short-term liquidity across currencies, and fund foreign assets.
- The price is the swap points, which are the interest differential over the period.
- It carries almost no exchange-rate risk and considerable funding risk, which is the opposite of what its name suggests.
Do these against a clock → — one at a time, ninety seconds each, answer before you look.
Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.
Test yourself: five questions
Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.
Who pays whom, drawn
The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page. 1 of them carry a second diagram, folded shut, for what happens after the bargain is struck — clearing, delivery, custody. That half is deliberately separate: a clearing house is not a party to the bargain.
- FX Spot — What the quote costs you, and what you actually exchange
- FX Forward — Today's rate, tomorrow's exchange
- Non-Deliverable Forward — Settling a currency that never moves
- FX Swap — The same money, borrowed and returned
- Cross-Currency Swap — Where FX meets funding, for years at a time
Who does this: Foreign Exchange is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.
The Foreign Exchange product shelf
FX Spot
Exchanging one currency for another, settled in two days — the deepest market humanity has built.
Explore →FX Forward
Lock an exchange rate for a future date — the corporate world's everyday currency hedge.
Explore →FX Future
The exchange-traded twin of the FX forward — same economics, public prices, a clearing house instead of a credit line.
Explore →Dual Currency Deposit
A deposit with a headline rate several times the going one, which the bank may repay in a currency you did not want.
Explore →Non-Deliverable Forward
A forward for currencies you can't take home — settled in dollars against an official fixing.
Explore →FX Swap
Borrow one currency against another: the invisible funding machine underneath global finance, and the one nobody sees.
Explore →Cross-Currency Swap
Swap debt from one currency into another for years at a time — principal, interest and all.
Explore →Concepts, comparisons and case studies about foreign exchange
- EasyHow to Size a PositionPlaybooksThe decision that determines outcomes more than any view, made by almost everyone in the wrong order
- EasySalesIndustryThe seat between a market and somebody who has to use it — and the only one on a trading floor whose product is a…
- EasyThe Asian Crisis, 1997Case StudiesCurrency pegs, borrowing in a currency you do not earn, and the fastest reversal of capital flows on record
- EasyThe Swiss Franc Floor, 2015Case StudiesA central bank promised a floor for three years, repeated the promise weeks before abandoning it, and moved a major…
- MediumCurrency-Hedged vs. UnhedgedCompareHedging removes a risk and adds a cost, and which one dominates depends entirely on the asset
- MediumGlobal MacroIndustryTrading what a government or a central bank is about to do, in whichever market expresses it most cleanly
- MediumRisk MeasuresConceptsTurning "how bad could it get" into a number — and knowing exactly how that number lies to you
- MediumVolatilityConceptsFinance's stand-in for risk: measured from the past, traded in the present, feared about the future — and an asset…