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. 001What is the difference between a forward and a future?Forwards and futuresCorephone / first roundSell-side sales and trading

   Say this

   Economically they are the same trade: an agreement today to transact at a fixed price on a future date. The differences are all plumbing, and the plumbing changes the risk. A future is exchange-traded, standardised and margined daily through a clearing house; a forward is a bilateral OTC contract with no daily cash movement and live counterparty risk.

   Then walk it

   1. Standardisation: a future has a fixed contract size, fixed delivery dates and a fixed deliverable grade. A forward is whatever the two parties write down, which is why corporates use forwards to hedge an exact exposure.
   2. Credit: the future faces a central counterparty, so your credit exposure is to the clearing house and it is collateralised every day. A forward leaves you exposed to the other side for the whole life of the trade.
   3. Cash flow: a future is marked to market daily and variation margin moves in cash, so your profit and loss is realised as you go. A forward settles once, at maturity.
   4. Liquidity: you close a future by trading out of it on the exchange. You close a forward by negotiating an unwind with the same counterparty, or by writing an offsetting trade and carrying both.
   5. The one real pricing difference falls out of the daily cash flows. Because margin is paid and received at whatever the short rate is, a future and a forward on the same asset only have identical fair prices if rates are deterministic.
   6. In practice the daily margin is the point. A hedge that is economically perfect can still kill you if the variation margin calls arrive before the offsetting gain does, which is what happened to Metallgesellschaft.

   Where candidates lose it

   Listing exchange-traded versus OTC and stopping there. The interviewer wants you to connect the plumbing to a risk: daily margin turns a paper loss into a cash call, and that liquidity risk is the reason the distinction matters on a desk.

   Expect next

   • So is the fair forward price ever different from the fair futures price?
   • Which would a corporate treasurer prefer for hedging a dollar payable, and why?
   • What happens to your hedge if you get margin-called and cannot fund it?
2. 002Price a one-year forward on a non-dividend-paying stock trading at 100, with rates at 5 percent. Show me why it has to be that number.Forwards and futuresCoretechnicalProp trading firms

   Say this

   105, or 105.13 if you compound continuously. The forward price is the spot price grown at the risk-free rate, and the reason is not a model — it is that any other number lets me build a portfolio that makes money with no risk and no capital.

   Then walk it

   1. The replication: borrow 100 at 5 percent, buy the stock today, hold it for a year. At maturity I own the stock and owe 105. So locking in delivery at 105 costs me nothing today.
   2. If the forward traded at 110, I do exactly that trade and simultaneously sell the forward at 110. In a year I deliver the stock, collect 110, repay 105, and keep 5 with zero risk and zero net investment. Everyone would do it until the price fell back.
   3. If the forward traded at 100, I reverse it: short the stock, invest the 100 at 5 percent, buy the forward. A year later I have 105, pay 100 for the stock, return the borrow, keep 5.
   4. So F equals S times e to the rt, or S times one plus r for annual compounding. Nothing about expected returns, volatility or the stock's beta enters it.
   5. Add dividends and they subtract, because holding the stock pays you something the forward does not: F equals S times e to the r minus q times t. On a commodity, storage cost adds and convenience yield subtracts.
   6. The honest caveat: the arbitrage assumes I can borrow at the risk-free rate, short freely and hold to maturity with no margin. In practice the borrow cost on a hard-to-short name, or a wide repo spread, opens a band around the theoretical price inside which no arbitrage is available.

   Where candidates lose it

   Reaching for expected stock returns. Candidates feel that a forward on a high-beta stock should be priced higher. It is not, because the forward is replicated by holding the stock itself, so the risk premium is already inside the spot price. Say the replication out loud before you say the formula.

   Expect next

   • Now add a 2 percent dividend yield.
   • What if you cannot borrow the stock to short it?
   • Does the answer change if I tell you the stock has a beta of 2?
3. 003What is cost of carry, and what do contango and backwardation tell you?Forwards and futuresCoretechnicalCommodities trading

   Say this

   Cost of carry is everything it costs or pays you to hold the physical asset instead of the forward: financing, plus storage and insurance, minus any yield you earn by owning it. Contango is when futures trade above spot, which is the normal state when carry is positive. Backwardation is futures below spot, and it tells you the market is short of the physical right now.

   Then walk it

   1. The identity: futures equals spot, plus financing, plus storage, minus convenience yield. Contango means financing and storage dominate. Backwardation means convenience yield dominates.
   2. Convenience yield is the value of having the barrel or the bushel in your hand. A refinery that runs out of crude stops; a refinery holding inventory does not. That option has value and it shows up as a negative carry term.
   3. So backwardation is a scarcity signal. It is the physical market saying it will pay a premium for delivery now rather than in three months, which is exactly what you see during a supply shock.
   4. Financial assets are almost always in contango, because there is no convenience yield in owning an index and storage is free. Equity index futures trade above spot by financing less dividends.
   5. The trading consequence is roll yield. A long position in a contango market sells the cheap near contract and buys the expensive far one every month, so you bleed. In backwardation, rolling pays you. This is why long commodity index products underperformed spot through most of the 2010s.
   6. The limit of the framework: you can arbitrage contango wider than full carry by buying spot and storing, but you cannot arbitrage backwardation, because you cannot borrow a barrel of oil that does not exist. That asymmetry is why backwardation can go to extremes and contango cannot.

   Where candidates lose it

   Defining contango and backwardation as shapes on a chart without naming convenience yield or roll yield. The two follow-ups are always 'why can't you arbitrage backwardation' and 'what does that do to a long ETF holder'. Have both ready.

   Expect next

   • Why can you arbitrage a contango that is too steep but not a backwardation?
   • What does the curve shape do to a long commodity ETF's return versus spot?
   • Crude went to a negative price in April 2020. How does that fit your framework?
4. 004Explain initial margin, variation margin and mark-to-market on a futures position.Forwards and futuresCoretechnicalClearing and risk

   Say this

   Initial margin is the good-faith deposit you post before you trade, sized to cover a bad one- or two-day move. Variation margin is the daily cash settlement of your profit and loss. Mark-to-market is the process that computes it: every evening the clearing house revalues your position at the settlement price and moves cash between accounts.

   Then walk it

   1. Initial margin is a risk number, not a price. Exchanges set it from a volatility model — SPAN or a value-at-risk approach — so it rises when the market gets wild, usually at the worst moment for the people holding losing positions.
   2. Variation margin is real cash, paid daily, and it is a settlement rather than collateral. Your loss leaves your account permanently; you do not get it back when the position recovers, you get it back through the next day's gain.
   3. Maintenance margin is the floor. Fall below it and you get a margin call to top back up to initial, and if you do not meet it the broker closes you out. The close-out is not discretionary and it does not wait for your view to be right.
   4. Worked example: one Nifty futures lot at 25,000 with a lot size of 25 is about 6.25 lakh of notional. At roughly 12 percent margin you post about 75,000. A 1 percent adverse move is 6,250 of variation margin, so 8 percent of your posted margin gone in a day on a 1 percent move.
   5. That leverage is the whole point of the question. Futures let you carry ten times your cash, which means a move that is trivial to a cash investor is existential to a futures position.
   6. The risk to name: this is a liquidity mechanism as much as a credit one. A hedger who is economically flat can still be forced out because the margin on the futures leg is cash today while the gain on the physical leg is months away.

   Where candidates lose it

   Calling variation margin collateral. It is a daily settlement of profit and loss, which is why futures have no accumulated credit exposure and forwards do. Also, give a number. An answer with no arithmetic reads as read rather than done.

   Expect next

   • What is the difference between variation margin and collateral posted under a CSA?
   • Why does initial margin rise exactly when you can least afford it?
   • How did the margin mechanism cause the nickel squeeze on the LME in 2022?

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.