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. 050You think the skew is too steep. How do you trade that, and what are you exposed to?Option strategiesHardsuperdayVolatility tradingExotics trading

   Say this

   Sell the risk reversal: sell the out-of-the-money put and buy the out-of-the-money call, in vega-neutral ratio, and delta hedge. That is a direct bet that the put wing is expensive relative to the call wing. What you are exposed to is a crash, because you have sold exactly the insurance that pays off in one.

   Then walk it

   1. Structure: short the 25-delta put, long the 25-delta call, sized so the two vegas offset, then hedge the residual delta with futures. Now you are flat level of volatility and short skew.
   2. Why skew can be too steep: it contains a risk premium as well as a distributional forecast. After a shock the put wing often stays bid for months on hedging demand long after the realised tail risk has faded, which is when the trade has an edge.
   3. The exposures. You are short vanna, so a selloff that lifts volatility hits you twice. You are short the left tail outright, so a genuine crash is a large loss, not a marked one. And you have positive carry in a calm market, which is the seductive part.
   4. This is a classic picking-up-pennies trade, so the sizing rule matters more than the view: define the loss in a minus 20 percent, plus 25 volatility scenario before you put it on, and make that number survivable.
   5. The alternative expression is a put spread instead of an outright short put — sell the 25-delta put and buy the 10-delta. You keep most of the skew edge and cap the tail. You give up some premium and the trade becomes about the slope between two wing strikes rather than the whole wing.
   6. And the honest historical note: skew has been persistently 'too steep' on most measures since 1987, and shorting it has been profitable on average and career-ending in specific years. The trade is a volatility-of-volatility exposure as much as a skew view, and any backtest that does not include 2008, 2018 and 2020 is not telling you about the risk.

   Where candidates lose it

   Proposing a naked short put as the skew trade. The interviewer wants vega-neutral construction, a delta hedge, and an explicit statement of the tail. And you should volunteer the put-spread version, because capping the wing is what makes the trade institutional rather than reckless.

   Expect next

   • How do you make it vega-neutral, and why does that matter?
   • What does vanna do to you in a selloff?
   • Why has skew been persistently steep since 1987?
2. 051Structure a product for a client who wants equity upside with capital protection. What do you build and what are you not telling them?Option strategiesHardcase studyStructured productsWealth management

   Say this

   A zero-coupon bond plus a call option: put most of the money in a bond that matures at par to guarantee the principal, and spend the rest on index calls for the upside. What I would not hide is that the participation rate is set by how much premium the bond leaves over, that you forgo dividends, and that the protection is only as good as the issuer's credit.

   Then walk it

   1. The build on 100 rupees with a five-year horizon and rates at 7 percent: a zero-coupon bond maturing at 100 costs about 71. That leaves 29, less the dealer's margin, to buy five-year at-the-money index calls.
   2. If those calls cost 20, the participation rate is about 130 percent of the index move; if implied volatility is high and they cost 35, you cannot even get to 100 percent participation, and the structure has to be cheapened with a cap or a knock-out.
   3. So participation is a residual, not a feature. High rates make protection cheap and structures generous; low rates and high volatility make them mean. That is the single most useful thing to explain to a client who is comparing two notes.
   4. The things a sales deck buries: you receive no dividends over five years, which on an equity index is a substantial forgone return; the capital protection is an issuer obligation, not a segregated guarantee, which is what made 2008 Lehman notes worthless; and secondary liquidity is at the dealer's bid.
   5. The cheapening devices to watch for are where the real risk is: a knock-in put that turns protection into leveraged downside, an autocall that ends the trade just as it starts working, or a worst-of basket that sounds diversified and is actually short correlation.
   6. The comparison I would give honestly: for a client who can tolerate the volatility, a bond and equity blend replicates most of this at a fraction of the fee. The structure earns its keep when the client genuinely cannot bear a nominal loss, or has a regulatory or accounting reason to need a floor. Otherwise it is a well-packaged way of paying for behaviour.

   Where candidates lose it

   Building the bond-plus-call structure and presenting the participation rate as a design choice. It is arithmetic — it falls out of rates, volatility and fees. And you must name the issuer credit risk and the forgone dividends, because that is the disclosure test the interviewer is actually running.

   Expect next

   • What happens to the participation rate if rates fall to zero?
   • Where is the client short correlation in a worst-of basket?
   • Would a simple 70-30 portfolio do better, and when would it not?

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.