Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
FX & Rates
5 conceptsCross rates
Almost every currency trades against the dollar, so a rate between two other currencies — euro against yen, euro against sterling — is built by going through the dollar. If one euro buys 1.08 dollars and one dollar buys 147 yen, one euro buys 1.08 × 147 yen. Whether you multiply or divide depends on which side of each quote the dollar sits. The cost of that route is that you cross two spreads, always on the side that hurts you, which is why a cross is quoted wider than either of the dollar pairs it is made from.
Forward points
An FX forward is not a forecast. Anyone can manufacture one today: borrow dollars, buy euros, deposit them, and the amounts you owe and own at the end fix the rate. So the forward is spot adjusted for the interest rate gap, and nothing else. The currency with the higher interest rate trades at a forward discount — you are paid interest for holding it, and give that back through a worse forward rate. Forward points are simply that adjustment in pips. If a bank quotes a forward away from parity, the same borrow-convert-deposit trade locks in a risk-free profit.
Quoting conventions
An FX quote is a price for one unit of the first currency, paid in the second. That one sentence settles most confusion: in USD/JPY the dollar is the thing being bought and sold, in EUR/USD it is the money. The dealer’s bid is where it buys the first currency and its offer where it sells, so a client always buys at the higher number and sells at the lower. A pip is the smallest standard price step, and because the quote currency is the money, a pip’s value is naturally in that currency — which is why a USD/JPY pip is worth a different number of dollars every day and a EUR/USD pip is not.
Swap rates
An interest rate swap exchanges a fixed rate for a floating one on a notional that never changes hands. At inception it is worth nothing to either side, which pins the fixed rate: the par swap rate is the coupon that makes a fixed stream worth the same as the floating stream, and the floating stream is worth par. That turns the swap rate into a weighted average of the forward rates along the curve. Once rates move, the swap is no longer free: whoever pays a fixed rate below the new market rate holds something valuable. The annuity — the sum of discount factors — converts every basis point of rate difference into dollars.
Curve trades
Most rate views are not "rates will go up" but "the curve will change shape": short yields will fall faster than long ones when the central bank cuts, or rise faster when it hikes. A curve trade isolates that view. Buy one maturity, sell another, and size the legs so their DV01s match: a parallel move then makes nothing and loses nothing, and the P&L depends only on the spread between them. Get the sizing wrong — equal face amounts, say — and the "curve trade" is mostly an outright bet on the longer bond, because a 10-year note carries several times the rate risk of a 2-year.