Foreign Exchange (Forex or FX) Operations form the backbone of international finance, trade, and banking. Whether it is a multinational firm managing cross-border payments or a central bank maintaining currency stability, FX operations play a critical role in ensuring that global transactions happen smoothly and securely.
If you are preparing for an interview in the field of foreign exchange—whether at a bank, financial institution, or corporate treasury—understanding operational workflows, market concepts, regulatory requirements, and risk handling is essential. Interviewers look for candidates who can confidently explain basic terminology, perform key calculations, and handle real-world currency scenarios with clarity.
Let us begin by understanding what foreign exchange operations involve and how you can use these questions effectively.
What are Foreign Exchange Operations?
Foreign exchange operations refer to the processes, systems, and activities involved in the buying, selling, transferring, and settling of foreign currencies. These operations are a vital part of the global financial system and are managed by banks, central banks, multinational corporations, and investment firms.
In a typical commercial bank, the foreign exchange operations team handles customer currency transactions, manages settlements, maintains Nostro/Vostro accounts, books forward contracts, monitors exchange rate exposures, and ensures compliance with regulatory guidelines like FEMA (in India) or international standards like Basel III.
Key functions of FX operations include:
- Spot and forward currency trading
- Currency risk hedging through derivatives
- Trade finance and cross-border payment processing
- Settlement of foreign currency transactions
- Monitoring of foreign exchange exposure and compliance
In India, foreign exchange operations are governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA). Globally, organizations like SWIFT, CLS (Continuous Linked Settlement), and BIS (Bank for International Settlements) also play critical roles in facilitating and regulating FX transactions.
A solid understanding of these operations is essential for roles such as:
- Foreign Exchange Officer
- Treasury Operations Analyst
- Trade Finance Executive
- Forex Dealer
- Risk and Compliance Associate in FX
Next, let us look at how to use the interview questions in this blog to sharpen your preparation.
Here are Questions 1–15: Basic-Level Foreign Exchange Operations Interview Questions and Answers. These focus on foundational terms, transaction types, and basic processes commonly asked in interviews.
Foreign Exchange Operations Basic-Level Questions (1–15)
1. What is foreign exchange (forex)?
Answer:
Foreign exchange refers to the process of converting one currency into another for trade, investment, tourism, or banking purposes. It involves buying and selling currencies in the global financial market.
2. What is a spot transaction?
Answer:
A spot transaction is a foreign exchange deal where the currency exchange takes place immediately, usually settled within two business days. It uses the current exchange rate known as the spot rate.
3. What is a forward contract in forex?
Answer:
A forward contract is an agreement to buy or sell a specific amount of foreign currency at a predetermined exchange rate on a future date. It is used to hedge against exchange rate fluctuations.
4. What is the difference between direct and indirect exchange rates?
Answer:
- Direct rate: Home currency per unit of foreign currency (e.g., ₹83.50 per USD).
- Indirect rate: Foreign currency per unit of home currency (e.g., USD 0.012 per ₹1).
5. What is the bid-ask spread?
Answer:
The bid-ask spread is the difference between the price a dealer is willing to buy (bid) and sell (ask) a currency. It represents the dealer’s profit and market liquidity.
6. What is a cross currency transaction?
Answer:
A cross currency transaction involves two currencies other than the domestic currency. For example, if an Indian bank converts EUR to USD without involving INR, it is a cross currency deal.
7. What is a currency pair?
Answer:
A currency pair shows the exchange rate between two currencies, like USD/INR. The first currency (USD) is the base, and the second (INR) is the quote. It tells how much of the quote currency is needed to buy one unit of the base currency.
8. What is a telegraphic transfer (TT)?
Answer:
A TT is an electronic method of transferring funds internationally through the SWIFT network. It is commonly used for foreign remittances and settlements.
9. What is value date in foreign exchange?
Answer:
The value date is the future date on which a forex transaction is settled, i.e., when actual currency exchange occurs. For spot deals, it is usually two business days after the trade date.
10. What is the role of SWIFT in foreign exchange?
Answer:
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging system used by banks worldwide to exchange payment instructions, confirmations, and settlement messages in FX and trade finance transactions.
11. What is the difference between a Nostro and a Vostro account?
Answer:
- Nostro account: An account that a bank holds in a foreign country in that country’s currency.
- Vostro account: A foreign bank’s account held with a domestic bank.
Example: If an Indian bank holds USD in a U.S. bank, it is a Nostro account for the Indian bank and a Vostro for the U.S. bank.
12. What is a convertible currency?
Answer:
A convertible currency can be freely traded in global markets without restrictions from the issuing country. Examples include USD, EUR, GBP, and JPY. INR is partially convertible.
13. What is FEMA?
Answer:
FEMA (Foreign Exchange Management Act) is an Indian law that regulates foreign exchange transactions, cross-border investments, and remittances to ensure currency stability and compliance.
14. What is a merchant transaction in forex?
Answer:
A merchant transaction involves customers of a bank (like exporters/importers) dealing in foreign exchange. The bank buys or sells foreign currency on their behalf.
15. What is an interbank forex transaction?
Answer:
An interbank transaction is a foreign exchange deal between two banks. These are typically high-volume, wholesale trades used for managing liquidity, settlements, and currency exposure.
Intermediate-Level Questions (16–30)
Here are Questions 16–30: Intermediate-Level Foreign Exchange Operations Interview Questions and Answers. These questions go deeper into forex calculations, transaction handling, and operational terms commonly used in banking and treasury roles.
16. How are forward rates calculated in foreign exchange?
Answer:
Forward rates are derived by adjusting the spot rate using interest rate differentials between two currencies. The formula is:
Forward Rate = Spot Rate × (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate)
This ensures no arbitrage opportunities due to interest rate differences.
17. What is covered interest arbitrage?
Answer:
Covered interest arbitrage is a strategy where an investor uses forward contracts to lock in profits from interest rate differences between two countries while covering currency risk. It involves simultaneous borrowing and investing in two currencies.
18. What is the purpose of a deal ticket in forex operations?
Answer:
A deal ticket is a document that records the details of a forex transaction such as the currency pair, amount, rate, counterparties, value date, and settlement terms. It acts as the official record of the deal.
19. What is revaluation in forex operations?
Answer:
Revaluation refers to adjusting the value of foreign currency assets and liabilities on a bank’s books to reflect current market rates (usually at the end of a day or month). It helps recognize unrealized profits or losses.
20. What is a swap transaction in forex?
Answer:
A forex swap is a simultaneous purchase and sale of identical amounts of one currency for another but with different value dates. It is used for liquidity management or rolling over positions.
21. What is net open position (NOP)?
Answer:
NOP is the difference between a bank’s total forex assets and liabilities. It measures the exposure to currency risk. RBI and other regulators often place limits on a bank’s open positions.
22. What is value dating and why is it important?
Answer:
Value dating determines the actual date of settlement for a forex transaction. It is important for interest calculations, managing liquidity, and ensuring timely delivery of funds.
23. What is a cancellation and rebooking of a forward contract?
Answer:
If a client no longer needs a forward contract, it can be cancelled. The bank then rebooks a new forward deal, and the client pays or receives the difference between old and new rates (known as swap cost or gain).
24. What is the difference between TT buying and TT selling rates?
Answer:
- TT Buying Rate: The rate at which the bank buys foreign currency from a customer (e.g., inward remittance).
- TT Selling Rate: The rate at which the bank sells foreign currency to a customer (e.g., outward remittance).
These rates include margins over the interbank rate.
25. What is the role of the dealing room in a bank’s forex operations?
Answer:
The dealing room is where currency traders buy and sell foreign currencies in the interbank market. It manages exchange rate positions, liquidity, customer quotes, and regulatory compliance in real time.
26. What is a tom-next deal?
Answer:
A tom-next (tomorrow-next) deal involves selling currency for delivery tomorrow and simultaneously buying it back the next day. It is often used to manage overnight exposure.
27. What is the concept of cross rate?
Answer:
A cross rate is the exchange rate between two currencies calculated using a third (usually USD). For example, to get the EUR/JPY rate when only EUR/USD and USD/JPY are known.
28. What is settlement risk in foreign exchange?
Answer:
Settlement risk arises when one party to a forex trade delivers the currency but does not receive the counter-currency. This is also known as Herstatt Risk.
29. What is an option contract in forex?
Answer:
A forex option gives the right (but not the obligation) to buy or sell currency at a fixed rate before a certain date. It is used to hedge against unfavorable exchange rate movements.
30. What is back-to-back booking in forex?
Answer:
Back-to-back booking is when a bank executes a customer forex deal and immediately offsets the exposure by dealing in the interbank market, ensuring no open risk position.
Foreign Exchange Operations Advanced Conceptual Questions (31–40)
Here are Questions 31–40: Advanced Conceptual Foreign Exchange Operations Interview Questions and Answers. These focus on central bank policy, derivatives, settlements, and risk management in the forex domain.
31. How does a central bank intervene in the foreign exchange market?
Answer:
A central bank intervenes by buying or selling foreign currency to stabilize its domestic currency. This is done through spot or forward market operations, often using reserves, to manage volatility, inflation, or trade competitiveness.
32. What is a currency swap and how is it used?
Answer:
A currency swap is an agreement to exchange principal and interest payments in one currency for those in another. It is often used by companies or governments to hedge exchange rate or interest rate risks over the medium to long term.
33. What is Continuous Linked Settlement (CLS) and why is it important?
Answer:
CLS is a global settlement system that eliminates settlement risk by ensuring simultaneous delivery of both sides of a forex transaction. It uses payment-versus-payment (PvP) to prevent one party from defaulting after receiving funds.
34. How are currency derivatives used in forex risk management?
Answer:
Currency derivatives such as forwards, futures, options, and swaps allow companies and banks to hedge against adverse currency movements by locking in rates or setting limits on potential losses.
35. How does interest rate differential affect forward exchange rates?
Answer:
Forward rates adjust based on the interest rate difference between two currencies. A currency with a higher interest rate will typically trade at a forward discount, and a lower-rate currency at a forward premium, due to arbitrage
36. What are the major risks involved in foreign exchange operations?
Answer:
Key risks include:
- Market risk: Adverse currency movements
- Credit risk: Counterparty default
- Settlement risk: Failure in fund delivery
- Liquidity risk: Inability to square off positions quickly
- Operational risk: Errors in trade processing or documentation
37. What is the role of a treasury in managing foreign exchange exposure?
Answer:
The treasury monitors currency inflows/outflows, forecasts exposure, executes hedging strategies, and ensures compliance with internal risk limits and external regulations to protect against forex losses.
38. What is meant by pre-shipment and post-shipment finance in forex?
Answer:
- Pre-shipment finance: Funding provided to exporters for purchasing raw materials and production before shipment.
- Post-shipment finance: Credit extended after goods are shipped, against export bills or documents.
39. How are exchange rates determined in a floating exchange rate system?
Answer:
In a floating system, exchange rates are determined by market forces—demand and supply of currencies—based on trade flows, capital movement, interest rates, inflation, and speculation.
40. What is FEMA’s role in regulating forex operations in India?
Answer:
FEMA (Foreign Exchange Management Act) governs all foreign exchange transactions in India. It lays down rules for cross-border trade, investments, remittances, and sets penalties for violations. It replaced the older FERA regime to enable easier foreign exchange management.
Foreign Exchange Operations Scenario-Based Questions (41–50)
Here are Questions 41–50: Scenario-Based Foreign Exchange Operations Interview Questions and Answers. These test how you apply concepts in practical, real-world situations faced by forex desks, treasury teams, and banks.
41. A client has a large USD payment due in three months. How would you advise them to manage curency risk?
Answer:
Recommend booking a forward contract to lock in the current USD/INR rate, protecting against possible rupee depreciation. Alternatively, suggest a currency option if they want flexibility in case the rupee strengthens.
42. A client wants to book a forward contract. What are the key steps involved?
Answer:
- Take the client’s requirement (currency, amount, maturity).
- Quote a forward rate based on interest rate differential.
- Book the contract after agreement.
- Generate a deal ticket and confirmation.
- Monitor and settle the contract on maturity.
- Report under FEMA guidelines if applicable.
43. The INR suddenly depreciates sharply. What impact does this have on exporters and importers?
Answer:
- Exporters: Gain more INR for the same USD—benefits them if not already hedged.
- Importers: Have to pay more INR per USD—hurts margins if not hedged.
Prompt both to review hedging policies.
44. A customer asks for a TT selling rate for EUR. How do you arrive at it?
Answer:
Start with the interbank EUR/INR rate, add the bank’s margin/spread, and include charges if any. Consider cross rates via USD if direct EUR/INR is not available.
45. You notice a settlement mismatch in a currency deal. What is your immediate response?
Answer:
Notify the counterparty and internal compliance/ops team immediately. Recheck the deal confirmation, value date, and currency amount. If needed, initiate a correction (repair) before the cut-off time.
46. A client’s forward contract is maturing, but the payment is delayed. What options are available?
Answer:
- Roll over the contract to a new future date
- Cancel and rebook at current rates
Charges may apply, and MTM difference must be settled.
47. A bank’s open position in USD exceeds regulatory limits. What can be done?
Answer:
Square off excess exposure by executing offsetting trades or using swaps. If temporary, report the breach as per RBI norms and take internal approvals for exceptional exposure.
48. You are asked to compute the forward premium on USD/INR. How do you do it?
Answer:
Forward Premium = (Forward Rate – Spot Rate) / Spot Rate × 100 × (12 / No. of Months)
Expressed in percentage per annum.
49. A client complains of a higher-than-market exchange rate on their remittance. What do you do?
Answer:
Explain the TT rate mechanism, including margin, and provide rate history if needed. Recheck for any error in application. Offer a better rate on next deal as a goodwill gesture if justified.
50. A corporate client asks whether they should hedge using a forward or an option. What factors should you consider?
Answer:
- Forward: Lower cost, fixed rate, no flexibility
- Option: Premium payable, but allows favorable rate movement
Consider their risk appetite, cost sensitivity, and market view.
Core Concepts to Know Before Your Interview
Before stepping into a foreign exchange operations interview, it is important to understand not just the definitions but also how different systems, regulations, and tools function in real-time financial environments. This section outlines the essential concepts that interviewers expect you to be comfortable with—especially if you are applying for roles in banks, corporate treasury, or financial institutions.
1. Types of Foreign Exchange Contracts
Understanding the different types of forex contracts is crucial for handling client requests, managing risk, and booking deals accurately:
- Spot Contracts: Settled within two business days at the prevailing market rate.
- Forward Contracts: Agreements to buy or sell currency at a future date at a pre-agreed rate.
- Swaps: Simultaneous purchase and sale of the same currency with different settlement dates.
- Options: Give the right (but not obligation) to exchange currencies at a fixed rate before a specified date.
2. Exchange Rate Fundamentals
Being able to explain and apply basic exchange rate mechanics is key:
- Spot Rate vs Forward Rate
- Bid and Ask Prices: The rate at which banks buy (bid) and sell (ask) foreign currency.
- Cross Currency Rates: Rates derived using a third currency (e.g., calculating EUR/INR via USD).
- Forward Premium or Discount: Reflects interest rate differences between two countries.
3. Nostro and Vostro Accounts
These accounts are essential for settling cross-border transactions:
- A Nostro account is your bank’s account held in a foreign bank in that bank’s currency.
- A Vostro account is a foreign bank’s account held in your bank in your currency.
They ensure smooth international fund movement and are reconciled daily by operations teams
4. SWIFT and CLS Systems
You must be familiar with:
- SWIFT: The global messaging network used to transmit payment instructions securely.
- CLS (Continuous Linked Settlement): A real-time global settlement platform that reduces settlement risk by ensuring simultaneous delivery of both currencies in a transaction.
5. FEMA and RBI Regulations (India-Specific)
If you are preparing for a role in India, knowledge of regulatory compliance is mandatory:
- Rules on permissible current and capital account transactions.
- Limits on remittances and forex positions.
- Documentation and reporting requirements (e.g., Form A2, FETERS).
- Guidelines for hedging and dealing with resident and non-resident accounts.
6. Forex Trade Lifecycle
Understanding how a forex deal moves through its full cycle helps demonstrate your operational awareness:
- Deal booking and confirmation
- Value dating and rate fixing
- Settlement via Nostro accounts or CLS
- Reconciliation and general ledger posting
- Regulatory reporting and compliance checks
7. Major Risks in Forex Operations
Interviewers often assess how well you understand the risk environment:
- Market Risk: Adverse currency movements
- Credit Risk: Counterparty default
- Settlement Risk: Failure to receive or deliver funds on time
- Operational Risk: Errors in process, system, or human judgment
- Regulatory Risk: Non-compliance with FX laws or audit trails
8. Common Tools and Platforms
Familiarity with trading and settlement platforms adds practical value:
- Reuters Dealing and Bloomberg FXGO for rate discovery and trading
- SWIFT FIN messages (like MT103, MT202) for transaction processing
- Internal banking systems used for booking, limit checks, and reconciliations
Mastering these core areas will help you approach your interview with confidence and give you a strong foundation to perform well in a forex operations role. You will not just be answering questions—you will be speaking the language of real-world currency markets.
Conclusion
Foreign exchange operations play a vital role in facilitating global trade, cross-border payments, and financial market stability. Whether you are interviewing for a role in a bank’s forex desk, a corporate treasury team, or a trade finance division, being well-prepared with key concepts, operational workflows, and real-world scenarios can set you apart from other candidates.
As exchange rate markets continue to evolve and become more complex, staying updated with policy changes, RBI or central bank guidelines, and global settlement systems will give you an edge in both interviews and your day-to-day work.
Approach your preparation with curiosity, clarity, and consistency—and you will be well on your way to building a successful career in foreign exchange operations.
