If the question asks whether the freinds are women, why does it use the masculine Freunde? And why not the feminine Freundinnen?
Because the speaker doesn't know if the friends are women or not. Freunde can be both male and an unspecified general friends. If you ask Sind ihre Freundinnen Frauen? you would be asking "Are her female friends women?" which would make much less sense. If you know enough to ask about Freundinnen, then presumable you know they are women.
The plural of Freundin is Freundinnen, which indicates that it is only women.
If ihr is both 'her' and 'their' how do you know which is meant. Talking with someone about 'her friends' could be different to talking about 'their friends'
Like how in English, "you" can be one person or several -- how do you know which is meant?
If you say, "Come here!", how do you know whether you are talking to one person or to an entire group?
Only context can help. In the absence of context, both interpretations are possible.
If you're only hearing it, then it could be "your friends," but if you can see that "ihr" is not capitalized, then it cannot be the formal you, because that would be "Ihr."
"Are your (pural) friends women?" or as some people might say "Are your guy's friends women?"
Plural form of you in this sentence would be "Seid eure Freunde Frauen?".
If instead of "her friends," we wanted to say "your friends" "(2nd person: du/ihr/Sie,) the options would be the following: "Sind deine Freunde Frauen?" (deine/your = informal sing. "you") Sind eure Freunde Frauen? (ihr/your = informal plural, as in y'all) "Sind Ihre Freunde Frauen?" (Ihre/your = formal singular or plural, note the upper case "Ihre",) As for the last option, note that Duo's phrase: "Sind ihre Freunde Frauen" (ihre/her = is in lower case which distinguishes it in writing only from the formal Ihre. In the spoken language you'll need to put it in context as both ihre/Ihre are pronounced the same way.)
Note for razorwynd, English Grammar: re "your guy's" - is wrong. The correct colloquial/regional form is- you guys - where "guys" is always plural Note that the possessive form of 'you guys' = 'your guys's,' is considered very, very bizarre, not to say, wrong. More info on this link: https://english.stackexchange.com/questions/12277/what-is-the-possessive-of-you-guys
I answered "Are her friends female" and it's not correct-- are women and female not interchangable here?
No, they're not interchangeable. "Women" is a plural noun. "Female" is in this context an adjective. "Are her friends female?" would be Sind ihre Freunde weiblich?
Even if you consider "female" to be a noun (which sounds a bit strange to me in everyday speech about people), then your sentence would need to be "Are her friends females?". This is not however an accepted answer, as it sounds weird in the context of people. If talking about animals however, you might use the word Weibchen for "a female (animal)".