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. 068What does prime brokerage do, and how does it connect to the derivatives business?Market structure and clearingIntermediatetechnicalMSMorgan StanleyGlobal Markets · London · 2024

   Say this

   Prime brokerage is the outsourced back and middle office for a hedge fund, plus the financing. It provides custody, clearing, consolidated reporting, margin lending, stock borrow for shorting, and synthetic exposure through swaps. It connects to derivatives because the synthetic financing business — total return swaps and portfolio swaps — is where much of the balance sheet and much of the revenue now sits.

   Then walk it

   1. The core services: execution and clearing across brokers, custody of assets, one consolidated report of positions and profit and loss, cash management, and capital introduction to help the fund raise money.
   2. The revenue is mostly financing. Margin lending on the long book, the spread on stock borrow for the short book, and fees on the synthetic side. Rebate on short sale proceeds is a bigger line than most people expect.
   3. Synthetic prime is the derivatives link. Instead of the fund buying the stock and borrowing money, the prime broker holds the stock and writes a total return swap to the fund. The fund gets the economics, the broker keeps the position and charges a financing spread. It is more capital-efficient for the fund and often cheaper than cash prime.
   4. That structure also has consequences the industry learned about the hard way. Synthetic positions are not disclosed as ownership in most jurisdictions, and because each broker sees only its own slice, a client can build enormous concentrated leverage across several primes. That is exactly what Archegos did in 2021, and it cost Credit Suisse over 5 billion dollars.
   5. The risk management question for the broker is margin methodology on a concentrated, illiquid book — and whether you have the client's full picture. A dynamic margin model that accounts for concentration and liquidation horizon is the difference between a profitable business and Archegos.
   6. For the fund, counterparty risk cuts the other way, which is the Lehman lesson: assets that were rehypothecated in the UK entity were part of the insolvency estate, and funds lost access for years. Which is why serious funds now run multiple primes, negotiate rehypothecation limits, and monitor where their assets actually sit.

   Where candidates lose it

   Reciting a service list. A Global Markets interviewer wants to hear where the money is — financing, not execution — and how synthetic prime uses derivatives. Naming Archegos on the broker's side and Lehman on the fund's side turns a description into an understanding of the risk.

   Expect next

   • Where does a prime broker actually make its money?
   • What is synthetic prime and why do funds use it?
   • What went wrong in the Archegos episode?

   Reported by candidates at Morgan Stanley (Global Markets, London, 2024). Source: Wall Street Oasis.

2. 083What do you think this index closes at by the end of the year?Trading and marketsIntermediatetechnicalMSMorgan StanleySales and Trading · Tokyo · 2025

   Say this

   Give a number and build it, do not dodge it. Decompose into earnings growth and multiple: start from current index earnings, apply a growth rate you can defend, apply a multiple with a reason, and you have a level. Then give a range and say what the options market is currently implying, because that is the market's own answer.

   Then walk it

   1. The build: index level equals earnings times multiple. If earnings are growing 8 percent and the multiple is unchanged, you get 8 percent, and then you argue about the multiple — rates, risk premium and the growth outlook.
   2. Give one number and one range. 'My central case is up 6 to 8 percent from here, so roughly X, with a plausible band of minus 10 to plus 15.' Point forecasts are dishonest and no forecast is evasive; the number plus band is the professional answer.
   3. Then the market-implied cross-check, and this is where a derivatives candidate distinguishes themselves: the options market gives you a distribution for free. The at-the-money implied volatility annualised over the remaining period tells you the one standard deviation range the market is pricing, and the skew tells you the market's asymmetry.
   4. So you can say: the market is pricing about a plus or minus 12 percent one standard deviation range with a fat left tail, and my view is inside that range but with less downside than the skew implies — which is a trade, not just a forecast.
   5. Then the trade expression. If your view is modest upside with low volatility, sell a put spread or buy a call spread rather than buying outright calls. Matching the structure to the shape of the view is the point of being on a derivatives desk.
   6. And the risk to name: the level is driven by the multiple far more than by earnings over a one-year horizon, and the multiple is driven by rates and risk appetite, neither of which I can forecast. So the honest version is that my earnings number is a view and my multiple number is an assumption, and I would sensitise it.

   Where candidates lose it

   Refusing to give a number, or giving one with no construction. Both fail. Build it from earnings and multiple, then use the options market to give the range — that second step is free evidence and almost nobody does it.

   Expect next

   • What is the options market implying for the range?
   • Which part of your build are you least confident in?
   • How would you express that view in options rather than futures?

   Reported by candidates at Morgan Stanley (Sales and Trading, Tokyo, 2025). Source: Wall Street Oasis.

3. 093Why sales and trading?FitCorephone / first roundMSMorgan StanleyGlobal Markets · London · 2024

   Say this

   Because the feedback loop is immediate and the scorecard is public. You form a view, you put on risk, and the market tells you within hours whether you were right. I want to be in a seat where the judgement is measured rather than argued about, and where the horizon is short enough to learn quickly.

   Then walk it

   1. Lead with the feedback loop, because that is the genuine structural difference from banking or research: your work is priced continuously and by someone who does not care about your reasoning.
   2. Then the second real difference: markets is a flow business, so the value you add is in pricing, liquidity and relationships, not in a document. Say you prefer being judged on decisions than on deliverables — and mean it, because it also means being wrong in public.
   3. Then be specific about which part of markets, because sales and trading is three jobs. Say whether you are drawn to market making, to a client-facing sales seat, or to a structuring or strat role, and give a reason rooted in something you have done.
   4. Then the evidence. Trading your own account is fine if you talk about process and risk rather than returns. A trading competition, a research project on market microstructure, or a market-making simulation all work. What is being tested is whether you have ever made a decision under uncertainty and reviewed it honestly.
   5. Then acknowledge the cost, because it is a job with real drawbacks: the hours are front-loaded around the open, the electronification of flow means the seat looks different from ten years ago, and a bad run is visible to everyone. Saying you know that is more convincing than enthusiasm.
   6. Close on why this firm's markets business rather than any other. Something concrete about their franchise — a product they are genuinely strong in, the structure of their graduate rotation — not a line from the careers page.

   Where candidates lose it

   Reciting 'fast-paced environment' and 'I love markets'. Both are unfalsifiable. The answer that works names the feedback loop as the reason, picks which of the three sales and trading jobs you want, and gives one piece of evidence with a process described rather than a return quoted.

   Expect next

   • Sales or trading, and why?
   • How has electronification changed the job you are applying for?
   • Tell me about a decision you made under uncertainty and how you reviewed it.

   Reported by candidates at Morgan Stanley (Global Markets, London, 2024). Source: Wall Street Oasis.

4. 094Which divisions sit inside sales and trading, and what does each one do?FitCorephone / first roundMSMorgan StanleyGlobal Markets · London · 2024

   Say this

   Broadly two halves: equities and fixed income, currencies and commodities. Within each you have sales, which covers clients, trading, which prices and warehouses risk, and structuring or strats, which builds the products and models. Then the cross-cutting businesses: prime brokerage, research, and electronic or systematic market making.

   Then walk it

   1. Equities: cash equities, equity derivatives — flow options and structured — delta one and swaps, convertibles, and prime brokerage sitting alongside as the financing business for hedge funds.
   2. FICC: rates, meaning government bonds and swaps; credit, both cash and CDS; foreign exchange, spot, forwards and options; commodities; emerging markets, which is often organised as its own cross-product desk; and securitised products.
   3. The functional split inside each desk: sales owns the client relationship and distributes ideas and axes, trading prices and manages the resulting risk, and structurers and strats build bespoke products and the pricing infrastructure. In electronic businesses the quant developers are effectively the traders.
   4. The distinction worth making, because it shows you understand the modern business: flow trading is a spread and market-share business that is increasingly automated, while structured and exotic trading is about warehousing risk you cannot hedge perfectly. Those are different skills and different career paths.
   5. Then say where you want to sit and why, in one sentence. That converts a list into an answer. 'I want flow equity derivatives because the pricing is quantitative and the client dialogue is real, and I would rather learn in a business with high ticket volume.'
   6. And show you know the boundaries: research is separate and walled from trading, prime brokerage is a financing business not a trading one, and treasury or the XVA desk are internal-facing rather than client-facing. Getting those boundaries right is the detail that signals you actually researched the firm.

   Where candidates lose it

   Giving a vague two-line answer, or naming desks without saying what they actually do. This is a homework question and a wrong answer says you did not do the homework. Finish by naming the desk you want and why, because a list with no preference reads as indifference.

   Expect next

   • Which of those desks do you want, and why?
   • How is flow trading different from exotics?
   • Where does prime brokerage sit and why is it not a trading business?

   Reported by candidates at Morgan Stanley (Global Markets, London, 2024). 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.