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. 008Is a futures price a forecast of where spot will be?Forwards and futuresHardtechnicalCommodities tradingProp trading firms

   Say this

   No. A futures price is the spot price plus carry, set by arbitrage. It only equals the expected future spot price if the asset carries no risk premium, which is rarely true. Confusing the two is how people talk themselves into thinking a contango curve is a bullish forecast.

   Then walk it

   1. For a storable financial asset, the futures price is pinned by replication. It contains no view at all: spot times the carry factor, and nothing else fits without an arbitrage.
   2. The expected spot price is a different object. It equals the futures price plus whatever risk premium hedgers are paying to lay off the risk. Keynes called the version where futures sit below expected spot normal backwardation.
   3. So the curve tells you about carry and inventory, not direction. A steep contango in oil says storage is full and financing is expensive; it is not the market predicting a rally.
   4. Empirically the futures curve is a poor forecaster, and that is exactly what makes carry strategies work. If futures were unbiased forecasts, there would be no systematic return to being long backwardated markets and short contango ones.
   5. Where the distinction bites in practice: a long commodity index investor in a 10 percent annualised contango loses roughly that much to roll before spot has moved at all. People buy the index expecting spot exposure and get spot minus carry.
   6. The caveat: for a non-storable like electricity, or for VIX futures where there is no arbitrage to hold the underlying, the curve does carry genuine expectational content, because replication is impossible and the price is set by supply and demand for the risk.

   Where candidates lose it

   Saying yes because the curve is upward-sloping and that must mean the market expects higher prices. It is the single most common misread of a futures curve. Lead with no, give the replication argument, then concede where the curve does contain a forecast.

   Expect next

   • So why do carry strategies earn a return?
   • Where does the curve genuinely contain expectations rather than carry?
   • What does a steep VIX contango tell you, and how do short-vol products harvest it?
2. 009When is a futures price different from a forward price on the same asset?Forwards and futuresHardtechnicalRates derivativesProp trading firms

   Say this

   When interest rates are random and correlated with the asset. The daily margin on a future means your gains get reinvested and your losses get funded at the prevailing short rate, so the correlation between the asset and rates has value. Positive correlation makes the future worth more than the forward; negative correlation the reverse.

   Then walk it

   1. With deterministic rates the two prices are identical. The proof is a replication where you scale the futures position by the discount factor each day, which is only possible if you know that factor in advance.
   2. Introduce stochastic rates and the asymmetry appears. If the asset tends to rise when rates rise, a long future receives variation margin exactly when it can be reinvested at a high rate, and pays it when funding is cheap. That is worth something, so the futures price sits above the forward.
   3. Negative correlation flips it, which is why this matters most in fixed income: bond prices fall when rates rise, so the correlation is strongly negative and the gap is real rather than theoretical.
   4. The size depends on the correlation, the volatility of rates and the maturity. On a three-month contract it is a rounding error. On a long-dated Eurodollar or SOFR strip it is material enough to have its own name: the convexity adjustment.
   5. That adjustment is why you cannot read a swap curve straight off futures. A futures strip needs a convexity correction before it gives you the forward rates a swap is priced off, and in the 1990s misunderstanding this was a genuine source of losses.
   6. Second-order effects also drive a wedge: the future is collateralised and the forward may not be, so the forward carries a credit and funding charge — CVA and FVA — that has nothing to do with rates at all.

   Where candidates lose it

   Saying the two are always equal because the textbook proof says so. The proof assumes deterministic rates and the interviewer knows it. Name the convexity adjustment and say where it is large enough to matter, which is long-dated rates.

   Expect next

   • Which way does the convexity adjustment go for a Eurodollar future, and why?
   • Why can you not read forward rates directly off a futures strip?
   • How do collateral and funding costs drive a separate wedge between the two?

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.