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

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Type

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1. 085How would you allocate one million dollars versus one billion dollars?Trading and marketsIntermediatetechnicalScotiabankSales and Trading · Toronto · 2025

   Say this

   The million is a pure return problem, the billion is a liquidity and market-impact problem. At a million I can own whatever I like and get in and out in a day. At a billion my own trading moves prices, my universe shrinks to what can absorb size, and the constraint becomes how I build and exit a position rather than what I want to own.

   Then walk it

   1. At a million: concentrated is rational. Five to ten positions, small and mid caps available, options strategies viable in size because a hundred contracts is nothing to the market. Transaction costs are a rounding error.
   2. At a billion, capacity binds. A 5 percent position is 50 million, and in a small cap that is weeks of average daily volume — so the small and mid cap universe largely disappears, and I am pushed towards large caps, index derivatives and government bonds.
   3. Market impact becomes the dominant cost. Building 50 million in a moderately liquid name will move it, and the impact is not recovered. So execution — algorithms, participation rates, blocks, working the order over days — becomes part of the investment decision rather than a back-office task.
   4. The derivative alternative is the interesting answer for this desk: at a billion, index futures and total return swaps let me take beta exposure instantly without moving underlying stocks. Get the market exposure on cheaply in futures, then build the alpha positions slowly underneath.
   5. Number of positions rises for capacity reasons rather than diversification reasons, and that mechanically dilutes any edge. This is the core reason large funds' returns converge towards the index — not worse ideas, just less ability to express them.
   6. And the exit is the part people forget. A position you can build over three weeks may need to be sold in three days in a crisis, when liquidity is a fraction of normal. So at a billion I would size positions against stressed liquidity, not average liquidity, and keep a derivative overlay as the fast lever. The reason to do this is not theoretical: it is exactly the mismatch that forced the 2022 UK LDI funds and several credit funds into distressed selling.

   Where candidates lose it

   Answering it as a risk-tolerance question — 'more diversified with more money'. The real answer is capacity, market impact and exit liquidity, and the derivatives-desk version is that futures and swaps let you separate getting the exposure on from building the position. Size against stressed liquidity, not average.

   Expect next

   • How would you get the beta on quickly at a billion?
   • How does capacity dilute your edge?
   • How would you size against stressed liquidity rather than average?

   Reported by candidates at Scotiabank (Sales and Trading, Toronto, 2025). 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.