Derivatives Foundation interview preparation

Questions

100

Traced to a firm

29

Firms

19

Updated

September 2026

Asked at

All firmsMSMorgan Stanley4Nomura4Akuna Capital2Amundi2HSBC2PIMCO2Bank of America1Barclays1Citadel1DRW1Goldman Sachs1Jane Street1Millennium Management1Mizuho1Old Mission Capital1RCRBC Capital Markets1Scotiabank1UBS1Wells Fargo Securities1

Topic

All topicsForwards and futures10Options basics8Option pricing7The Greeks10Volatility7Option strategies9Swaps and rates7Credit derivatives4Market structure and clearing6Indian derivatives8Trading and markets9Brainteasers6Fit9

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseMarket viewBrainteaserFit

1. 055What is effective duration, and when would you use it instead of modified duration?Swaps and ratesIntermediatetechnicalAmundiRates · London · 2018

   Say this

   Effective duration is measured rather than derived: you shock the whole yield curve up and down by a small amount, reprice the bond with its options and cash flow rules intact, and read the sensitivity off the two prices. You use it whenever the cash flows themselves depend on rates — callables, putables, mortgages, floaters — because modified duration assumes they do not.

   Then walk it

   1. Formula: price down minus price up, divided by twice the initial price times the size of the shock. It is a numerical derivative, which is the whole point — you are not assuming a closed form.
   2. Modified duration is computed from fixed, known cash flows. The moment a bond is callable, the issuer's option changes the cash flows as rates move, so the analytical number is simply wrong.
   3. Callable bonds are the classic case. Rates fall, the call becomes likely, the expected life shortens, and duration falls — so the bond's price rise is capped. That is negative convexity, and effective duration captures it while modified duration cannot.
   4. Mortgage-backed securities are the extreme version, because prepayment behaviour is the option. Effective duration on an MBS moves sharply with rates, which is why convexity hedging by mortgage portfolios amplifies rate moves in the Treasury market.
   5. It is also the right measure for a floating-rate note, where the coupon resets. A floater has a long maturity and an effective duration of months, because its price barely responds to a level shift in rates.
   6. The caveat worth adding: effective duration is model-dependent, since repricing a callable requires an assumption about volatility and about how the issuer exercises. Two houses will produce different effective durations for the same bond, and the difference is a model choice rather than a data error. And the parallel-shift assumption is still in there — key rate durations are how you get past it.

   Where candidates lose it

   Treating effective and modified duration as synonyms, or defining effective duration with a formula but no reason to prefer it. Name a bond with embedded optionality — callable or mortgage — and say that its cash flows move with rates. That is the whole distinction.

   Expect next

   • What is the effective duration of a floating-rate note?
   • Why does a callable bond have negative convexity?
   • How does MBS convexity hedging move the Treasury market?

   Reported by candidates at Amundi (Rates, London, 2018). Source: Wall Street Oasis.

2. 084What would your allocation be in today's market?Trading and marketsIntermediatetechnicalAmundiRates · London · 2018

   Say this

   Start with the benchmark and state your deviations, because an allocation answer with no anchor is untestable. Then give three or four active positions, each with a reason, a size and a way of being wrong. And for a rates seat, make duration and curve positioning the centre of the answer rather than an afterthought.

   Then walk it

   1. Anchor first: 'against a 60-40 benchmark' or 'against a global aggregate index'. Then your tilts are measurable and the conversation can be about the tilts rather than about taste.
   2. Then the positions with sizes. Something like: duration slightly short of benchmark because the curve has too much easing priced; overweight the front end versus the long end, which is a steepener; underweight credit because spreads are near cycle tights and the compensation for illiquidity is thin; and a small allocation to convexity through options rather than cash.
   3. Each position needs one sentence of reasoning that refers to a price, not a sentiment. 'Spreads at X basis points against a cycle median of Y' is a reason. 'Credit feels expensive' is not.
   4. For a rates desk, be specific about the curve rather than the level. Level views are crowded and hard; curve and cross-market views — this country's five-year against that one's — are where rates managers actually take risk, and saying so shows you know the seat.
   5. Then the risk budget, which is what separates an allocation from a list. Say how much of your tracking error each position consumes, and note that a steepener and a credit underweight are correlated positions in a risk-off event, so you cannot size them independently.
   6. And the falsifier: name the data point that would make you cut. For the duration view it is a run of inflation prints above expectation; for the credit view it is spreads tightening through a level at which the carry no longer compensates. Ending on what would change your mind is the difference between an allocation and an opinion.

   Where candidates lose it

   Listing asset classes with adjectives and no benchmark, no sizes and no correlations. The interviewer is testing portfolio construction, not market views. And on a rates seat, if your answer is entirely about the level of yields and never about the shape of the curve, you have answered the wrong question.

   Expect next

   • Which two of those positions are correlated?
   • How much of your risk budget does each consume?
   • What would make you cut the duration position?

   Reported by candidates at Amundi (Rates, London, 2018). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.