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. 036What is the difference between implied and realised volatility, and which one are you actually trading?VolatilityCoretechnicalVolatility tradingProp trading firms

   Say this

   Realised volatility is what the underlying actually did — measured from historical returns. Implied volatility is what the option market is charging, backed out of the price. When you buy an option and delta hedge it, you are long realised and short implied: you make money if the world turns out more volatile than the price you paid.

   Then walk it

   1. Realised is backward-looking and measurable: annualise the standard deviation of log returns, typically by multiplying the daily figure by root 252. The answer depends on your window, which is why people argue about it.
   2. Implied is forward-looking and is a price, not a forecast. It contains the market's expectation plus a risk premium plus supply and demand for that specific strike and expiry.
   3. The trade: buying a delta-hedged option is long realised volatility, short implied. The profit over the life is roughly the gamma-weighted difference between the two, which is why a variance swap — whose payoff is exactly realised variance minus a strike — is the clean expression of the view.
   4. A number to anchor it: Nifty realised volatility runs in the low teens in calm periods while India VIX often sits a few points above. That gap is the premium, and it is persistent enough that systematic short-volatility strategies exist to harvest it.
   5. The two are not even measuring the same object. Implied is a risk-neutral expectation over the option's remaining life. Realised is a sample statistic over a past window. Comparing them requires matching horizons, and most casual comparisons do not.
   6. The limitation to volunteer: implied above realised does not mean options are expensive. It means you are being paid for taking crash risk, and the payment looks generous right up to the point where you find out why it existed. February 2018 and March 2020 are the two reference points.

   Where candidates lose it

   Treating implied volatility as the market's forecast of realised volatility. It is a price with a risk premium in it, and a persistent gap is compensation rather than mispricing. Saying so is what separates an answer from a definition.

   Expect next

   • So is a persistent gap between them an inefficiency?
   • How would you measure realised volatility, and over what window?
   • What is the cleanest instrument for trading realised against implied?
2. 043Explain a covered call. When is it the right trade and what is the real risk?Option strategiesCorephone / first roundWealth managementIndian broking

   Say this

   Long the stock, short a call against it. You collect premium and cap your upside at the strike. It is the right trade when you are mildly bullish to neutral and would be happy to sell at the strike. The real risk is not the stock falling — it is that you have sold the upside tail, which is where most of an equity's long-run return lives.

   Then walk it

   1. Payoff: you keep the premium plus any appreciation up to the strike, and above that you deliver the stock. Below, you take the full downside less the premium you received.
   2. So it is the same payoff shape as a short put at that strike — the synthetic equivalence falls straight out of put-call parity. Anyone selling covered calls should know they are running a short-put risk profile.
   3. When it works: a range-bound stock, a high implied volatility that you think is overpriced, or a genuine intention to exit at the strike. Overwriting is also a legitimate income overlay for a mandate that has to generate yield.
   4. The honest risk: your worst outcome is being right about direction and wrong about magnitude. The stock triples, you delivered at plus 10 percent, and you have converted an asymmetric long-run payoff into a capped one. Equity index returns are driven by a small number of very large up moves, so capping them is expensive.
   5. There is also a tax and path problem in practice: getting called away triggers a realisation you may not have wanted, and rolling the short call up in a rally locks in a loss on the option leg while the stock leg is unrealised.
   6. Where I would actually use it: on a position I already intended to trim, at a strike that equals my target exit price, with the premium as a sweetener. Framing it as income on a core holding you want to keep forever is the mis-sale, and it is a very common one in retail advisory.

   Where candidates lose it

   Selling it as free income. The interviewer will ask what happens in a 40 percent rally, and the answer that gets respect is that a covered call is a short put in disguise and you have sold the fat right tail. Say the synthetic equivalence out loud.

   Expect next

   • What position is a covered call equivalent to?
   • The stock rallies 50 percent. What do you do?
   • Would you recommend a covered call programme to a long-term retirement portfolio?
3. 047Why would you buy a call spread instead of just buying a call?Option strategiesCoretechnicalIndian brokingWealth management

   Say this

   Because you have a target, not an unbounded view. Selling the higher strike funds a chunk of the premium, cuts your theta and vega, and raises your probability of profit — at the cost of capping the payoff. If your thesis is 'up 8 percent by June' rather than 'up a lot', the spread is the honest expression of it.

   Then walk it

   1. Mechanics: buy the 100 call for 5, sell the 110 call for 2, net cost 3, maximum payoff 10 at or above 110. You have turned a 5-point bleed into a 3-point bleed and a 7-point maximum gain.
   2. The Greeks get tamer. Vega and theta both shrink because you are long one option and short another, so a fall in implied volatility hurts far less. If you are worried about buying expensive volatility, the spread protects you against that.
   3. Probability of profit rises because the break-even is nearer. You need the stock at 103 rather than 105, which on a one-month view is a meaningful difference.
   4. It is also a skew trade whether you intend it or not. In an equity index the calls you sell are cheaper in implied terms than the calls you buy, so a call spread is a mildly unattractive skew position. Put spreads in equities work the other way — you sell the expensive wing.
   5. Where it goes wrong: the payoff is capped, so a takeover or a squeeze that takes the stock to 150 pays you the same 7 as a move to 110. If your thesis has a fat-tail scenario in it, the spread is the wrong structure.
   6. And near expiry a spread can be awkward to close — you may have to trade out of two legs in thin markets, or face assignment on one leg and not the other. The neat payoff diagram assumes you hold to expiry, and in practice the exit cost is real.

   Where candidates lose it

   Just saying it is cheaper. Cheaper is not a reason on its own — you paid less and you get less. The answer is about matching the structure to the shape of your view, plus the reduction in vega if you think implied volatility is high. Mention the skew direction to sound like a trader.

   Expect next

   • How does the skew affect a call spread versus a put spread in equities?
   • What if the stock gets taken over at a 50 percent premium?
   • Which leg would you close first if you wanted out early?
4. 052What is an interest rate swap, and why would a company enter one?Swaps and ratesCorephone / first roundRates derivativesCorporate treasury

   Say this

   Two parties exchange interest payments on a notional that never changes hands — typically one pays fixed and receives floating, the other the reverse. Companies use them to change the interest rate character of debt they have already issued, without refinancing it.

   Then walk it

   1. Mechanics: on a five-year, 100 million rupee notional swap, one side pays a fixed rate semi-annually and receives the floating benchmark reset each period. Only the net difference settles, so the cash flows are small relative to the notional.
   2. The classic corporate use: a company issues a floating-rate loan because that is what the bank offered, then pays fixed on a swap to convert it into synthetic fixed-rate debt. It has locked its interest cost without renegotiating the loan.
   3. The reverse is just as common. A company with a fixed-rate bond that wants floating exposure — perhaps because its revenues are rate-sensitive — receives fixed on a swap. This is asset-liability matching, and for a bank it is the core of managing the gap between deposits and loans.
   4. There is also a comparative advantage story, which is where swaps came from: two borrowers each have better access to a different market, so they each borrow where they are cheap and swap the payments. The gain is split between them.
   5. Pricing: at inception the swap has zero value, because the fixed rate is set so the present value of the fixed leg equals that of the floating leg. It then acquires value as rates move, which is how it becomes a live mark-to-market and margin exposure.
   6. The risks to name: rate risk obviously, but also that a hedge which is economically right creates accounting volatility unless you qualify for hedge accounting, and that collateral calls under the CSA can be substantial even when the hedge is doing its job. Treasurers who did not model the collateral drain have been caught out by that more than by the rate move.

   Where candidates lose it

   Describing the exchange of cash flows without saying why a company would bother. The answer is about converting the character of existing debt without refinancing. And notional is not exchanged in a plain vanilla rate swap — saying otherwise gets you marked down instantly.

   Expect next

   • Is the notional exchanged?
   • What is the swap worth on day one, and why?
   • How does a bank use swaps to manage its deposit book?
5. 063When would a client want an exchange-traded derivative and when an OTC one?Market structure and clearingCorephone / first roundSell-side sales and trading

   Say this

   Exchange-traded when they want liquidity, price transparency and no counterparty risk, and they can live with standardised terms. OTC when the exposure they are hedging does not match any listed contract — an odd maturity, an odd notional, a bespoke underlying — and they are willing to pay a wider spread and take credit risk for the precision.

   Then walk it

   1. Exchange: standard size, standard dates, central clearing, continuous two-way prices, and margin set by the exchange. You can get out by trading, not negotiating.
   2. OTC: any terms you can agree. A corporate hedging a 47 million dollar payable on the 14th of March cannot do that with 1,000-lot standard contracts without leaving a residual.
   3. The cost of precision is the spread and the credit. An OTC trade is priced with CVA and funding charges built in, and you are exposed to the dealer — collateralised under a CSA, but exposed between margin calls.
   4. Hedge accounting pushes corporates to OTC too. A precise hedge that matches the exposure qualifies for hedge accounting and avoids profit and loss volatility; a proxy hedge with basis risk may not.
   5. Since 2009 the line has blurred. Standardised OTC products — most vanilla interest rate swaps and index CDS — are now centrally cleared and often traded on electronic platforms, so they have exchange-like credit and margin with OTC-like flexibility on terms.
   6. The practical rule I would give a client: start with the listed market, and only go OTC for the residual you genuinely cannot hedge there. Most treasurers who ended up in trouble had a bespoke structure where a plain vanilla listed hedge would have covered 90 percent of the exposure at a fraction of the cost and with none of the complexity.

   Where candidates lose it

   Presenting it as a two-column comparison table with no judgement. The interviewer wants you to pick, and the answer that lands is 'listed by default, OTC only for the residual you cannot hedge there'. Mention that cleared OTC now sits in between.

   Expect next

   • What does a corporate give up by using a listed contract?
   • How has clearing changed the distinction since 2009?
   • Why does hedge accounting push clients towards OTC?

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.