FX Models : Quant Interview Playbook

Foreign Exchange is the most misunderstood asset class in quantitative finance.

Most candidates learn Black–Scholes, SABR, or Heston — yet fail interviews and desks because FX does not behave like equities or rates. FX is a relative price, driven by interest-rate differentials, carry, correlation, and regime shifts, not just volatility.

This guide is a desk-first, decision-driven FX modeling playbook, built to bridge the gap between academic models and real trading, risk, and interview expectations.

This is not a theoretical text.

This is how FX desks actually think, price, hedge, and explain PnL.

What This Guide Covers

🔹 FX Market Reality

Why FX has no natural drift

Carry as the dominant PnL driver

G10 vs EM regime behavior

Why macro dominates short-term price moves

🔹 Garman–Kohlhagen as the FX Coordinate System

Domestic vs foreign measures

Interest-rate parity and forward pricing

Why GK is still the foundation of FX desks

🔹 FX Volatility Smile (The Right Way)

ATM, Risk Reversal, Butterfly decomposition

What skew actually represents in FX

Sticky-delta vs sticky-strike (and why barriers break models)

🔹 Local Vol vs Stochastic Vol

Why Dupire fails for barriers

Heston vs SABR in FX context

Parameter instability and calibration traps

When stochastic vol is necessary — and when it’s dangerous

🔹 Jumps & Event Risk

Central bank announcements as scheduled jumps

Why jump risk cannot be delta-hedged

Model reserves and desk-level adjustments

🔹 Quanto & Hybrid FX Models

Correlation entering the drift

Numeraire change intuition

FX–Rates–Equity hybrid pricing logic

🔹 FX PnL & Hedging

Spot, carry, vol, skew, correlation PnL

Why FX PnL attribution is different from equity

Residual PnL diagnostics and model failure detection

🔹 Model Selection Framework

Which model for:

Vanilla options

Barriers

Digitals

Exotics

EM FX

Speed vs accuracy trade-offs

Pricing vs risk vs capital models

🔹 Interview Toolkit

25+ desk-level FX interview questions

Decision trees, red-flag answers, and pressure scenarios

“What to say” vs “what not to say”

Model choice justification under time pressure

Who This Is For

Aspiring FX Quants & Strats

Desk Quants (FX / Hybrid desks)

Risk & XVA Quants

Traders who want model intuition

Candidates preparing for FX quant interviews

What Makes This Different

Model choice tied directly to PnL and hedging

Explains why models fail, not just how they work

Desk language, not textbook language

Covers insights not available in public resources

Coupon Code

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Disclaimer

These notes are for educational purposes only.

They do not constitute financial advice, trading recommendations, or investment guidance.

All models discussed are simplifications of reality and carry inherent limitations.

Past market behavior does not guarantee future results.

Use professional judgment when applying any model in real trading or risk environments.