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. 029What is vega, and where on the surface is it biggest?The GreeksIntermediatetechnicalEquity derivativesVolatility trading

   Say this

   Vega is the change in option value for a one-point move in implied volatility. It is biggest for long-dated at-the-money options, and it scales roughly with the square root of time. That is the key structural fact: gamma lives at the front of the curve, vega lives at the back.

   Then walk it

   1. Both calls and puts have positive vega, because higher volatility widens the distribution and both are convex payoffs. Being long options is being long volatility, full stop.
   2. Magnitude: vega is proportional to spot times root time times the standard normal density at d1. Root time means a two-year option has about five times the vega of a one-month option on the same notional.
   3. So the division of labour on a desk: if you want to trade the level of volatility you use long-dated options or variance swaps. If you want to trade the movement of the underlying you use short-dated options, where gamma dominates and vega is almost irrelevant.
   4. Vega is not one risk, it is a surface of risks. A book can be vega-flat in total and still be badly exposed if it is long front-month and short back-month volatility — that is vega term structure risk, and desks bucket vega by expiry rather than summing it.
   5. Numbers: an at-the-money one-year index option with 10 million of notional might carry 40,000 of vega, so a three-point volatility spike is 120,000. In March 2020 index implied volatility went from 15 to 80 in three weeks. That is the scale of the risk.
   6. The limitation: vega assumes a parallel shift in implied volatility, and real surfaces do not shift in parallel. Front-month volatility moves far more than back-month, and the skew steepens as the level rises. So you need vanna and volga — the cross-sensitivities to spot and to volatility itself — before your vega number means anything on a skewed book.

   Where candidates lose it

   Saying vega is biggest at the money and stopping, without the root-time scaling. The distinction that matters is that gamma is a short-dated risk and vega a long-dated one; if you cannot say which instrument to use for which view, you have not answered a trading question.

   Expect next

   • So which option would you buy to express a pure view on the level of volatility?
   • Why is a vega-neutral book still exposed to volatility?
   • What are vanna and volga, and when do they matter?
2. 030Rho gets ignored. When does it actually matter?The GreeksIntermediatetechnicalRates derivativesEquity derivatives

   Say this

   Rho is the sensitivity of an option's value to the interest rate. It is negligible on short-dated equity options, which is why nobody talks about it, and it is first-order on long-dated options, on FX, and on anything with a large strike relative to spot. It came back into focus when rates went from zero to five percent.

   Then walk it

   1. Sign: calls have positive rho, puts negative. A higher rate lowers the present value of the strike you will pay, which helps the call and hurts the put.
   2. Size: rho scales with time and with the discounted strike. On a one-month at-the-money option a 25 basis point rate move is a rounding error. On a five-year option it can be worth more than a volatility point.
   3. So where it bites: long-dated structured products, LEAPS, and the embedded options in insurance and pension liabilities. Anyone running a long-dated book in 2022 saw their option values move on rates as much as on volatility.
   4. In FX, rho is not one number but two, because you have the rate on each currency. The forward points are the rate differential, so an FX option's exposure to rates is really an exposure to the carry, and on a high-differential pair like USD/INR that dominates.
   5. Rates also change behaviour, not just value. Early exercise on American puts becomes optimal at higher rates, and the cost of carrying a delta hedge is a financing cost that grows with the rate. At five percent, financing a one-million-share hedge is a real line item in the profit and loss.
   6. The honest caveat: for the typical short-dated index option trade, rho is genuinely ignorable and pretending otherwise is false precision. The judgement being tested is whether you know which Greeks to care about for which instrument, rather than whether you can list five of them.

   Where candidates lose it

   Dismissing rho entirely, or over-claiming its importance. The right answer is a judgement about maturity and instrument: irrelevant for weekly index options, first-order for a five-year structured note and for FX carry. And name the financing cost of the hedge, which most candidates miss.

   Expect next

   • How does rho work differently in FX?
   • What did the 2022 rate cycle do to long-dated option books?
   • How does a higher rate change your delta hedging cost?

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.