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. 053How do you price an interest rate swap?Swaps and ratesIntermediatetechnicalRates derivativesQuant trading

   Say this

   Value each leg as a bond and take the difference. The fixed leg is a set of known cash flows discounted on the curve; the floating leg is worth par at each reset, so it discounts to a simple expression. The swap rate is the fixed rate that makes the two legs equal, so the swap is worth zero at inception.

   Then walk it

   1. Fixed leg: sum the fixed coupons, each discounted by the appropriate discount factor. That is just a bond price without the principal.
   2. Floating leg: the elegant result is that a floating-rate note resets to par at every coupon date, so the whole floating leg is worth notional times the difference between two discount factors. Alternatively, project each forward rate off the curve and discount it — same answer.
   3. Set them equal and solve for the fixed rate. The swap rate is a weighted average of the forward rates over the life, with the discount factors as weights.
   4. Post-2008 the important refinement is that you use two curves, not one. You project the floating rate off the relevant forward curve — SOFR or MIBOR — and you discount on the curve that matches the collateral you actually post, which for a cleared swap is the overnight rate. That is OIS discounting, and it materially changed swap valuations in 2009 to 2010.
   5. Why that matters: before the crisis everyone discounted at LIBOR and assumed one curve served both purposes. The crisis blew out the basis between overnight and term rates, revealing that discounting must reflect the funding cost of the collateral, not the index on the floating leg.
   6. Then the valuation adjustments for an uncollateralised swap: CVA for the counterparty's default risk, FVA for the cost of funding an unhedged position, and for the dealer, capital charges. A swap with a corporate that posts no collateral prices meaningfully away from the cleared mid, and that gap is a real charge, not a spread grab.

   Where candidates lose it

   Giving the single-curve textbook answer. Any rates interviewer will follow up on OIS discounting and the multi-curve framework, because that is the actual market practice since 2010. Also be ready to say why a floating leg is worth par at reset — the argument, not the formula.

   Expect next

   • Why do you discount on a different curve from the one you project on?
   • Why is the floating leg worth par at each reset?
   • How would the price change for an uncollateralised corporate counterparty?
2. 054How does duration affect interest rate risk?Swaps and ratesIntermediatetechnicalPIMCODebt Capital Markets · San Diego · 2026

   Say this

   Duration is the sensitivity of a bond's price to a change in yield, in years. A duration of 7 means a 100 basis point rise in yields costs you roughly 7 percent of value. So duration is not a description of the bond's maturity — it is the size of your interest rate exposure, and it is what you hedge.

   Then walk it

   1. Macaulay duration is the weighted average time to receipt of the cash flows. Modified duration divides that by one plus the yield, and it is the number you use for price sensitivity.
   2. The working formula: percentage price change is approximately minus modified duration times the yield change. Add convexity for large moves — plus a half times convexity times the yield change squared — because the price-yield relationship is curved, not linear.
   3. Convexity is your friend as a bondholder: it means you lose less on a rate rise than duration alone predicts and gain more on a fall. Which is also why convexity costs something in the price.
   4. The drivers: longer maturity, lower coupon and lower yield all raise duration. A zero-coupon bond's duration equals its maturity, which is the cleanest case and the reason zeros are the sharpest rate instrument.
   5. How it gets used: dollar duration, meaning duration times market value, is what you actually hedge. If a 500 million portfolio has duration 7, its dollar duration is 35 million per 100 basis points, and you short enough bond futures or pay fixed on enough swap notional to offset it.
   6. The limitation to volunteer: duration assumes a parallel shift in the curve. Real curves steepen, flatten and twist, so a duration-matched portfolio can still lose money on a curve move. That is why desks look at key rate durations bucketed along the curve rather than one number. And for callable or mortgage-backed bonds, duration itself changes with yields — negative convexity — so the static number misleads exactly when you need it.

   Where candidates lose it

   Defining duration as average time to cash flows and stopping. The question asks about risk, so lead with the sensitivity reading and the dollar duration hedge. And name the parallel-shift assumption — a bond manager will expect key rate durations to come up.

   Expect next

   • What does convexity add?
   • How would you hedge the duration of a 500 million portfolio?
   • Where does duration break down as a risk measure?

   Reported by candidates at PIMCO (Debt Capital Markets, San Diego, 2026). Source: Wall Street Oasis.

3. 055What is effective duration, and when would you use it instead of modified duration?Swaps and ratesIntermediatetechnicalAmundiRates · London · 2018

   Say this

   Effective duration is measured rather than derived: you shock the whole yield curve up and down by a small amount, reprice the bond with its options and cash flow rules intact, and read the sensitivity off the two prices. You use it whenever the cash flows themselves depend on rates — callables, putables, mortgages, floaters — because modified duration assumes they do not.

   Then walk it

   1. Formula: price down minus price up, divided by twice the initial price times the size of the shock. It is a numerical derivative, which is the whole point — you are not assuming a closed form.
   2. Modified duration is computed from fixed, known cash flows. The moment a bond is callable, the issuer's option changes the cash flows as rates move, so the analytical number is simply wrong.
   3. Callable bonds are the classic case. Rates fall, the call becomes likely, the expected life shortens, and duration falls — so the bond's price rise is capped. That is negative convexity, and effective duration captures it while modified duration cannot.
   4. Mortgage-backed securities are the extreme version, because prepayment behaviour is the option. Effective duration on an MBS moves sharply with rates, which is why convexity hedging by mortgage portfolios amplifies rate moves in the Treasury market.
   5. It is also the right measure for a floating-rate note, where the coupon resets. A floater has a long maturity and an effective duration of months, because its price barely responds to a level shift in rates.
   6. The caveat worth adding: effective duration is model-dependent, since repricing a callable requires an assumption about volatility and about how the issuer exercises. Two houses will produce different effective durations for the same bond, and the difference is a model choice rather than a data error. And the parallel-shift assumption is still in there — key rate durations are how you get past it.

   Where candidates lose it

   Treating effective and modified duration as synonyms, or defining effective duration with a formula but no reason to prefer it. Name a bond with embedded optionality — callable or mortgage — and say that its cash flows move with rates. That is the whole distinction.

   Expect next

   • What is the effective duration of a floating-rate note?
   • Why does a callable bond have negative convexity?
   • How does MBS convexity hedging move the Treasury market?

   Reported by candidates at Amundi (Rates, London, 2018). Source: Wall Street Oasis.

4. 056Given a portfolio of three bonds, explain how the portfolio changes if duration increases.Swaps and ratesIntermediatetechnicalPIMCOGeneralist · Los Angeles · 2026

   Say this

   Portfolio duration is the market-value-weighted average of the individual durations, so if it increases you have become more exposed to rates — you gain more when yields fall and lose more when they rise. The question is which lever moved it: the weights, a change in the bonds themselves, or a shift in yields.

   Then walk it

   1. Start with the arithmetic. Say a 2-year at 30 percent weight with duration 1.9, a 10-year at 40 percent with duration 8.2, and a 30-year at 30 percent with duration 19. Portfolio duration is 0.57 plus 3.28 plus 5.7, about 9.6 years.
   2. Shift 10 percent from the 2-year into the 30-year and duration goes to about 11.3. So the sensitivity per 100 basis points has gone from 9.6 percent of value to 11.3 — you have added roughly 1.7 percent of NAV per 100 basis point move.
   3. Duration can also rise without you trading. Yields falling raises duration mechanically, and the long bond's weight in the portfolio grows because it rallied most. So a bull market in bonds lengthens your duration passively, which is a real drift risk in an unmanaged book.
   4. The long bond dominates. It is 30 percent of the money and nearly 60 percent of the risk, and that concentration is the first thing I would point out. Weighting by market value tells you nothing about where the risk sits; dollar duration does.
   5. Convexity rises too, and non-linearly, so the portfolio becomes more asymmetric: better in a large rally than duration predicts, better than a shorter portfolio in a large selloff too, relative to its own duration.
   6. Two limitations to volunteer. First, averaging durations assumes a parallel shift — this portfolio is really a bet on the whole curve, and a flattening would hurt the 30-year and help the 2-year regardless of the average. Second, if any bond has credit risk, the spread duration is a separate exposure, and in a selloff spreads and rates often move together.

   Where candidates lose it

   Answering qualitatively — 'more rate sensitive' — without doing the weighted average. Put numbers on it, then make the two real points: the long bond carries most of the risk despite a modest weight, and duration drifts upward on its own in a rally. That is what a fixed income manager wants to hear.

   Expect next

   • Which bond carries most of the risk, and is that what the weights suggest?
   • How would you bring the duration back down without selling the long bond?
   • What if the curve flattens instead of shifting in parallel?

   Reported by candidates at PIMCO (Generalist, Los Angeles, 2026). Source: Wall Street Oasis.

5. 057How does a currency swap differ from an interest rate swap, and who uses one?Swaps and ratesIntermediatetechnicalFX derivativesCorporate treasury

   Say this

   In a currency swap the notionals are in two different currencies and they are exchanged — at the start, at the end, or both — and the interest payments are made in their own currencies. That makes it a funding instrument as much as a rate instrument, and it carries principal risk that a plain rate swap does not.

   Then walk it

   1. Structure: you pay rupee interest on a rupee notional and receive dollar interest on a dollar notional, with the two notionals exchanged at the outset at spot and re-exchanged at maturity at the same rate. So you have both rate and currency exposure managed in one trade.
   2. The classic use: an Indian company issues a dollar bond because the market is deeper and cheaper, then swaps it into rupees so its liability matches its rupee revenues. It has raised offshore and ends up with a domestic-currency obligation.
   3. The reverse flow is what drives the market: foreign issuers raising in a currency because the swap back to their home currency is cheap. That relative cheapness is the cross-currency basis, and it is a funding indicator, not just a spread.
   4. Cross-currency basis is worth naming. In theory covered interest parity should hold and the basis should be zero. Since 2008 it has been persistently negative for dollar funding, because of balance sheet constraints on dealers and structural dollar demand. That persistent deviation is one of the clearest post-crisis examples of an arbitrage that is not arbitragable.
   5. Risk profile: because principal is exchanged, the credit exposure is far larger than on a rate swap of the same notional. A currency swap can be deeply in the money on the principal leg alone, which is why they carry heavier collateral and capital treatment.
   6. The limitation to say: the hedge is only clean if the maturity matches the exposure. Companies that rolled short-dated currency hedges against long-dated dollar debt have been caught by both the basis widening and the rupee depreciating at the same moment, which is precisely the correlation a short hedge fails to capture.

   Where candidates lose it

   Saying the difference is 'two currencies' without noting that principal is exchanged, which is the reason the credit exposure is much larger. And if you are interviewing anywhere India-facing, have the Indian issuer swapping dollar debt back into rupees as your example, plus the cross-currency basis.

   Expect next

   • What is the cross-currency basis and why is it not zero?
   • Why is the credit exposure bigger than on a rate swap?
   • How would an Indian corporate hedge a ten-year dollar bond?
6. 058Walk me through the move from LIBOR to SOFR. What actually changed, and what broke?Swaps and ratesIntermediatetechnicalRates derivativesCorporate treasury

   Say this

   LIBOR was a survey of what banks said they could borrow at unsecured; SOFR is a volume-weighted average of actual overnight repo transactions secured by Treasuries. So the benchmark moved from judgement to data, and from unsecured term lending to secured overnight. The two hardest consequences were the loss of credit sensitivity and the absence of a forward-looking term rate.

   Then walk it

   1. Why LIBOR had to go: it was a submission, not a transaction. After the 2012 manipulation scandals and the collapse of real unsecured interbank lending, the rate was being set on a market that barely existed. Regulators ended it rather than patch it.
   2. What SOFR is: roughly a trillion dollars a day of actual repo transactions, secured, overnight. Essentially unmanipulable because of the volume, which was the whole design goal.
   3. First problem — no credit spread. LIBOR rose when bank funding stress rose, so a bank lending at LIBOR was naturally hedged to its own funding cost. SOFR is secured, so in a crisis it falls while bank funding costs rise. That is a real basis risk for lenders, and it is why credit-sensitive alternatives like BSBY and AMERIBOR appeared, and mostly failed to gain traction.
   4. Second problem — no term structure. LIBOR was quoted for three and six months in advance; SOFR is an overnight rate you only know in arrears. The market solved it with compounded-in-arrears conventions, plus CME Term SOFR for loan markets where borrowers need to know the coupon at the start of the period.
   5. Transition mechanics: ISDA's 2020 fallbacks protocol amended existing contracts to fall back to compounded SOFR plus a fixed credit adjustment spread — 26 basis points for three-month USD. That spread number is worth knowing, because it is the price the industry put on the credit component.
   6. India ran a parallel version. MIBOR-based products and the shift to overnight-indexed benchmarks, with the RBI pushing users off LIBOR references in external commercial borrowings by mid-2023. The same two issues appeared: no credit sensitivity and the need for a term rate. The unfinished part everywhere is the long tail of legacy contracts — loans, securitisations and bonds with fallbacks that were drafted for a temporary LIBOR outage, not a permanent end.

   Where candidates lose it

   Describing the change as 'LIBOR was manipulated so they replaced it'. The interviewer wants the two structural consequences: no credit sensitivity and no forward term rate. Knowing the credit adjustment spread exists, and roughly what it was for three-month USD, is what marks this out as real knowledge.

   Expect next

   • Why does the loss of credit sensitivity matter to a bank lender?
   • How does a compounded-in-arrears coupon work in practice for a borrower?
   • What happened to legacy contracts with no proper fallback language?

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.