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. 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?

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.