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. 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?
2. 044A client holds a large concentrated equity position and wants protection but hates paying premium. What do you show them?Option strategiesIntermediatetechnicalWealth managementEquity derivatives

   Say this

   A zero-cost collar: buy a put, fund it by selling a call, struck so the premiums net to zero. It gives them a floor without a cash outlay, and the price is giving up the upside above the call strike. If they will not accept an upside cap, the honest answer is that protection costs money and there is no way around it.

   Then walk it

   1. Structure it concretely: stock at 100, buy the 90 put, sell the 112 call, and the two premiums roughly offset. They are now locked into a band between 90 and 112 with no premium paid.
   2. The asymmetry in the strikes is the skew at work. Puts are more expensive than equidistant calls, so to fund a 10 percent-out put you have to sell a call closer than 10 percent out. Explaining that asymmetry to the client is part of the job.
   3. Alternatives worth showing: a put spread, which is cheaper than an outright put and still leaves upside open but only protects a band; or a longer-dated put, which costs more in absolute terms but far less per month of protection because vega scales with root time.
   4. For a genuinely concentrated founder position, there are also prepaid variable forwards and exchange funds, which address the concentration rather than just the price risk. Those have tax and lock-up consequences that usually dominate the pricing question.
   5. Constraints to raise before the structure: is the client an insider, does the position have a lock-up or pledge, and what does the collar do to their tax position. In several jurisdictions a tight collar can be treated as a constructive sale, which triggers the tax event they were trying to defer. That is the reason the call strike is often set wider than the pricing alone would suggest.
   6. And the behavioural risk: a collar that caps upside at 112 will feel like a mistake if the stock goes to 160, and the client will remember whose idea it was. So I would document the trade-off in their own words, and size the collar over part of the position rather than all of it.

   Where candidates lose it

   Presenting the zero-cost collar as free. It is not free, it is paid for with the upside, and the skew means the upside you give up is closer than the downside you protect. Also raise the tax and constructive-sale issue — that is the difference between a textbook answer and advice.

   Expect next

   • Why is the call strike closer than the put strike?
   • What are the tax consequences of a tight collar?
   • What would you do instead if the client refuses any upside cap?
3. 046If you think the market is overestimating volatility, what options strategy can you use?Option strategiesIntermediatetechnicalOld Mission CapitalProp Trading · Chicago · 2025

   Say this

   Sell a delta-hedged straddle, or sell a variance swap if one is available. The view is that implied volatility is above what will be realised, so you want to be short implied and long nothing directional — which means selling options and hedging the delta as you go, not just selling a strangle and hoping.

   Then walk it

   1. Cleanest expression: short at-the-money straddle, delta hedged continuously. You collect the premium and pay away the realised variance, so if realised comes in below the implied you sold, the difference is your profit.
   2. Even cleaner if the market exists: short a variance swap. The payoff is exactly the strike variance minus realised, with no re-striking and no path dependence in the exposure.
   3. If the view is specifically that implied volatility itself will fall rather than that realised will be low, sell longer-dated options where vega dominates, or sell VIX futures or calls. Those are different trades — one is a realised-volatility view, the other a mark-to-market view on the surface.
   4. Then the risk management, which is really what the question is testing. Naked short volatility has unbounded loss and negative convexity, so the professional version is an iron condor or a short straddle with wings bought — you cap the tail, give up some premium, and survive the event that proves you wrong.
   5. Sizing rule I would say out loud: size to the loss in a plausible tail, not to the premium collected. If a 5 standard deviation move ends the account, the position is too big whatever the expected value says.
   6. And the honest caveat: implied above realised is the normal state, so being short volatility is a bet that the premium is bigger than usual, not that it exists. You need a reason — a specific event that has passed, a supply imbalance, a spike that has already resolved — rather than a general sense that options are expensive.

   Where candidates lose it

   Answering 'sell a straddle' and stopping. A prop shop is testing whether you delta hedge, whether you cap the tail, and whether you can distinguish a realised-volatility view from a view on implied. Volunteer the sizing rule before they ask what happens in a crash.

   Expect next

   • How do you cap the tail, and what does it cost you?
   • Is your view about realised volatility or about implied volatility falling?
   • How would you size it?

   Reported by candidates at Old Mission Capital (Prop Trading, Chicago, 2025). Source: Wall Street Oasis.

4. 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?
5. 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?
6. 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.

7. 062What section of the indenture deals with payment waterfalls, and how does cash actually move through a structured credit deal?Credit derivativesHardsuperdayNomuraStructured Products · New York · 2026

   Say this

   The priority of payments section of the indenture, usually Article 11 in a CLO indenture, with the interest and principal waterfalls set out separately. Cash from the loan portfolio is collected in interest and principal accounts and then paid out strictly in seniority order, subject to coverage tests that can divert cash upward if the deal is underperforming.

   Then walk it

   1. Two waterfalls, kept separate by design. Interest proceeds pay fees, then senior note interest, then down the stack. Principal proceeds are used during reinvestment to buy more loans, and after that to amortise notes top-down.
   2. The accounts matter and this is what the operational question is really about: a collection account split into interest and principal, an unfunded amounts or ramp-up account at new issue, an expense reserve, and often an interest reserve for the first payment date before the portfolio is fully ramped.
   3. The tests are the teeth. Overcollateralisation and interest coverage tests are measured at each payment date, and a failure diverts cash that would have gone to the junior tranches into paying down the senior notes until the test is cured. That is the structural protection the AAA buyer is paying for.
   4. There is usually also a reinvestment overcollateralisation test which, if failed, sends a portion of equity distributions to buy more collateral rather than pay the equity — a softer version of the same mechanism.
   5. At new issue settlement the account structure is what trips people up: the ramp-up account holds undrawn proceeds, loans settle over weeks with delayed compensation, and the first payment date often needs an interest reserve because the portfolio has not been earning for a full period.
   6. The honest framing: the waterfall is the product. Credit analysis of the underlying loans matters, but the reason the AAA has performed through two cycles is the diversion mechanics, and the reason equity returns are volatile is that it sits last in both waterfalls and absorbs every test failure first.

   Where candidates lose it

   Waving at 'senior gets paid first'. This question is asked to find out whether you have read a document. Name the priority of payments section, name the interest and principal waterfalls separately, and name the overcollateralisation test diversion — that is the mechanic that defines the product.

   Expect next

   • What happens to equity distributions when the overcollateralisation test fails?
   • Which accounts exist at a new issue settlement and why?
   • Why has the CLO AAA performed so well through credit cycles?

   Reported by candidates at Nomura (Structured Products, New York, 2026). Source: Wall Street Oasis.

8. 070Explain the weekly expiry ecosystem in Indian index options and what it does to pricing.Indian derivativesIntermediatetechnicalIndian derivatives desksIndian broking

   Say this

   Weekly expiries created a market where most of the volume is in options with one to four days of life, which means enormous gamma and theta and almost no vega. Pricing on expiry day stops looking like Black-Scholes and starts looking like a supply and demand auction on a few strikes around spot, with implied volatility on the wings that no model would produce.

   Then walk it

   1. The mechanics: exchanges staggered weekly expiries across indices so that at one point there was an expiry nearly every day of the week, which concentrated retail activity into a daily cycle rather than a monthly one. SEBI cut this back to one weekly expiry per exchange in late 2024.
   2. What short dating does to the Greeks: a one-day at-the-money option has enormous gamma and theta and essentially no vega. So the trade is a pure gamma-versus-theta contest, and the volatility surface becomes almost meaningless as a level.
   3. The observable distortion: far out-of-the-money weekly options trade at implied volatilities of 60, 80, sometimes over 100 percent, not because anyone forecasts that volatility but because the option costs 2 rupees and there is a floor on the tick. Lottery demand sets the price of the wings.
   4. On expiry day the flow dominates. Large short-gamma positions must hedge in the direction of the move, so you get sharp intraday trends into the close, and then a pin towards the strike with the biggest open interest. That is dealer hedging mechanics, not information.
   5. The settlement convention interacts with it: because settlement is a VWAP of the last half hour, hedging demand is concentrated in that window, which is where you see the volume spike and the sharpest moves.
   6. The commercial honesty: this ecosystem exists because it generates extraordinary exchange and broker revenue and because retail demand for lottery payoffs is real. SEBI's own analysis found the large majority of individual derivative traders lose money, and the reforms since 2024 — fewer expiries, larger lots, higher margins near expiry — are a direct response. Anyone interviewing on an Indian desk should be able to say both that the ecosystem is a genuine liquidity pool and that its retail side is a wealth transfer.

   Where candidates lose it

   Describing weekly expiries as just a shorter-dated option. The interviewer wants the consequences: gamma and theta dominate, vega vanishes, wing implied volatilities become meaningless, and expiry-day price action is dealer hedging rather than information. And be able to state the retail loss data without editorialising.

   Expect next

   • Why do far out-of-the-money weeklies show implied volatilities over 80 percent?
   • What causes the sharp moves in the last half hour of expiry day?
   • What did SEBI change in 2024 and why?
9. 072SEBI data shows most individual derivatives traders lose money. Should retail access be restricted?Indian derivativesHardsuperdayIndian derivatives desksIndian broking

   Say this

   I would restrict the product design and the leverage rather than the access. The data is stark — SEBI's studies found roughly nine in ten individual traders losing money, with aggregate losses in the tens of thousands of crores — but an outright ban pushes the same demand into dabba trading and offshore apps, where there is no margin, no clearing and no recourse.

   Then walk it

   1. What the data actually says: across SEBI's 2023 and 2024 studies, the large majority of individual F&O traders lost money, losses were concentrated in short-dated index options, and a sizeable share of participants were young and new to markets. The average loss per loss-making trader was several times the median Indian household's annual savings capacity.
   2. The structural causes are identifiable rather than mysterious: weekly expiries create a near-daily lottery, tiny premiums make the minimum bet trivially small, mobile apps gamified the interface, and finfluencer marketing sold option selling as income.
   3. What SEBI has done and what I think is right: fewer weekly expiries, larger contract sizes, upfront margin collection, higher near-expiry margins, mandatory risk disclosures, and action against unregistered advisers. These raise the ticket size and remove the leverage without banning the instrument.
   4. What I would add: a suitability step for first-time derivatives users, a hard cap on intraday leverage for new accounts, and removing the ability to build a position out of many tiny lottery tickets. And I would look hard at broker incentives, since brokerage revenue is proportional to churn.
   5. The counter-argument to take seriously: adults are entitled to take risk with their own money, retail participation adds liquidity that institutional hedgers benefit from, and the same loss statistics are true of day trading equities. Singling out options is partly a choice about which losses we find visible.
   6. Where I land, and I would say it plainly: the case for intervention here is not paternalism about risk, it is that the product design was engineered for frequency rather than for hedging. Fix the design and the leverage, keep the access, and be honest that the market will lose real revenue when you do — which is why exchanges and brokers lobbied against every one of these changes.

   Where candidates lose it

   Taking a side without engaging the counter-argument, or reciting the loss statistics without a policy view. Interviewers on Indian desks ask this to see if you can hold a commercial position and an ethical one at once. Name the displacement risk — dabba trading and offshore apps — because that is the strongest argument against a ban.

   Expect next

   • Would a ban just move the activity offshore?
   • What is the strongest argument against restricting access?
   • Whose revenue falls if you are right?
10. 075How does a foreign investor hedge Indian equity exposure, and why does so much of it happen offshore?Indian derivativesHardsuperdayIndian derivatives desksEquity derivatives

    Say this

    Three routes: onshore index futures and options through an FPI registration, offshore instruments like SGX or GIFT Nifty and participatory notes, and total return swaps with a bank that holds the onshore position. The choice is driven less by pricing than by registration burden, tax treatment and position limits — which is why a large share of the risk transfer historically sat offshore.

    Then walk it

    1. Onshore: register as an FPI, get a custodian, and trade Nifty futures and options directly. You get the tightest pricing and deepest liquidity, and you accept Indian tax, reporting and category-level position limits.
    2. Offshore listed: the Nifty contract that traded on SGX migrated to NSE IX at GIFT City in 2023 as GIFT Nifty. It settles in dollars, trades nearly 21 hours, and lets an offshore investor take Nifty risk without an FPI registration or rupee exposure.
    3. Synthetic: a total return swap or participatory note written by a bank that holds the onshore hedge. The client gets the economics in dollars with no Indian registration. The cost is a financing spread and full counterparty risk to the issuer.
    4. The drivers of the offshore preference are structural: registration takes time, the securities transaction tax and capital gains treatment change the after-tax return, and the currency leg has to be hedged separately in a market with its own constraints. P-notes were largely a regulatory-arbitrage product and SEBI has steadily squeezed them.
    5. GIFT City is the deliberate policy answer — bring the offshore activity onshore into a tax-neutral IFSC with dollar settlement. The migration of the SGX Nifty contract was the flagship success, and rupee derivatives and offshore banking units are the next phase.
    6. The risk to flag, and it is the one that actually catches people: currency and equity are correlated for a foreign investor in India. The rupee weakens when foreign flows leave, which is when equities are falling, so an unhedged currency leg doubles the drawdown. Hedging the equity with GIFT Nifty in dollars looks clean but embeds the rupee move into the contract's value rather than removing it — you have to be explicit about which risk each leg is carrying.

    Where candidates lose it

    Listing the routes without the reason. The interviewer wants the drivers — registration, tax, limits — and the GIFT Nifty migration as the policy response. And the equity-currency correlation for a foreign investor is the analytical point most candidates miss entirely.

    Expect next

    • What happened to the SGX Nifty contract, and why did it matter?
    • Why has SEBI discouraged participatory notes?
    • How correlated are Indian equity drawdowns and rupee depreciation?

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.