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. 031You have sold a call and you are delta hedging it. Walk me through what you actually do over the option's life.The GreeksIntermediatetechnicalMarket makingEquity derivatives

   Say this

   You buy delta shares against the short call and rebalance as spot moves. Because you are short gamma, every rebalance means buying higher and selling lower, so you lose money on the hedge and you are paid theta to compensate. Over the life, your profit is the premium you collected less what the hedging actually cost you.

   Then walk it

   1. Day one: sell the 100-strike call at, say, 4.00 with a 0.5 delta, so buy 50 shares per contract. You are locally flat.
   2. Stock rises to 105. Delta is now 0.65, so you buy 15 more shares at 105. Stock falls back to 100, delta is 0.5, so you sell 15 shares at 100. You have just bought at 105 and sold at 100. That loss is what being short gamma means, and it is unavoidable.
   3. Do that repeatedly and the total hedging loss is roughly proportional to the realised variance of the stock. You keep money only if the stock realises less volatility than the 20-ish implied you sold at.
   4. So the profit and loss decomposition is clean: premium received, minus the realised variance cost, plus or minus the error from hedging discretely rather than continuously, minus bid-offer and financing on the share position.
   5. How often to rebalance is a real decision, not a technicality. Hedge too often and transaction costs eat you; too rarely and you run naked gamma between hedges. Desks usually hedge on a delta band — rebalance when delta moves more than some threshold — rather than on a clock.
   6. The failure mode to state: a gap. If the stock jumps from 100 to 130 overnight on a takeover, no rebalancing schedule saves you, because you were hedged for the 0.65 delta and you needed 1.0. Delta hedging manages diffusion risk, not jump risk, and that is exactly the assumption Black-Scholes makes and reality does not.

   Where candidates lose it

   Describing the mechanics without ever stating that the hedge loses money. Short gamma means the rebalancing is systematically adverse, and the theta you collect is the payment for it. If your answer does not contain 'buy high, sell low', you have not understood the trade.

   Expect next

   • How often would you rebalance, and what decides it?
   • Decompose your final profit and loss into its pieces.
   • The stock gaps 30 percent overnight. What happens to you?
2. 035You have just taken over a derivatives book from someone who left suddenly. What do you look at, in what order?The GreeksIntermediatesuperdayEquity derivativesRisk management

   Say this

   Directional exposure first, then convexity, then the things that cannot be hedged. Concretely: net delta, then gamma and where it is concentrated by strike and expiry, then vega bucketed by maturity, then the operational calendar — expiries, ex-dividend dates, barriers and any physically settled contract.

   Then walk it

   1. Net delta first, because it is the biggest and the easiest to neutralise. I want to be able to say in one number how much I make or lose on a 1 percent market move, and I would hedge any large residual with futures within the hour.
   2. Then gamma, and not just the total — where it sits. A book that is gamma-flat overall but long gamma at 24,000 and short at 25,000 is a different animal from a genuinely flat one, and the strike concentration tells you where the pain is.
   3. Then vega by expiry bucket. A summed vega number hides term structure risk. I want front month, second month, and beyond separately, because they do not move together.
   4. Then the calendar risks, which is where inherited books actually blow up: what expires this week, what has a barrier near spot, which names go ex-dividend, and whether anything settles physically rather than in cash.
   5. Then the stress grid. Profit and loss under spot down 10 and volatility up 10, spot down 20 and volatility up 25, and a single-name gap. Greeks are local; the grid is what tells me if there is a hole.
   6. And the unglamorous parts, said out loud because they are what catch people: does the position in the risk system reconcile with the clearing house, is there any trade with a manual mark, and what are the margin requirements if the market moves against me. I would rather find an unreconciled position on day one than on the day it matters.

   Where candidates lose it

   Listing all the Greeks in textbook order with no prioritisation. The question is about triage under uncertainty. Lead with 'hedge the delta first because it is the biggest and cheapest to fix', and include the operational checks — reconciliation and the expiry calendar — which is what someone who has actually held a book says.

   Expect next

   • What would you hedge in the first hour, and what would you leave?
   • Why does bucketing vega by expiry matter?
   • What operational risk would worry you most on a book you have not seen before?

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.