Over the past ten years, the number of people working in the sales and trading of stocks has gone down because many desks, like cash equities, have become almost entirely automated. However, the market for equity derivatives is still very strong.
Indeed, most of the equity derivatives desks across the street are looking for new sales and trading staff right away as they try to grow quickly.
To put things in perspective, when we talk about S&P 500 equity derivatives,
The first point is that we arent talking about desks going out and buying up retail flow (e. g. some random person buying a singular call option on a supposedly hot stock). Because they get paid for order flow, hedge funds make the market in this area. They give some savings to users, some money to platforms, and keep some for themselves.
According to Citadel Securities and Virtu Financial, some quant hedge funds are okay with buying a lot of retail order flow without knowing who placed the order. This is because they think everything is random. Since a random person buying a call option here or a put option there doesn’t know much about the market, these hedge funds don’t have to worry as much about getting caught in a bunch of trades.
This leads into the second point, equity derivative desks at sell-side banks (like GS, JPM, Citi, Barclays, etc. ) are dealing with clients who are institutional, sophisticated, and probably have some level of “edge”. This is why traders and salespeople are careful when a customer comes in wanting to make a trade.
Third, when these big, smart clients come to a sell-side equity derivatives desk, they usually want to make more big, smart trades. These are trades that need to be thought about for at least a few minutes or need a pricing model that goes beyond what’s normal.
For example, a client could come in and ask for 1,000 calls on Ford. An equity derivatives desk could give them a price in a few seconds by using one of their standard pricing models or even just putting the order in Bloomberg.
Fourth, the goal is to be a market maker and make money from each transaction. This is true in all areas of modern trading and sales. The larger and more thorny the transaction, the larger the fee will be. What this really means in terms of equity derivatives is that the bank wants to make the trade at a certain price that will let them quickly hedge their exposure to the trade (e.g. g. cut a spread between the money made from the trade and the money it costs to hedge out that trade so that they do not make or lose money over time.
The fifth and last thing I want to say about an equity derivatives desk is that everyone has a very clear job to do.
It will be hard no matter what part of an equity derivatives desk you work on. For example, as a salesperson, you might not be in charge of hedging out gamma risk, but you still need to know what gamma is in a trade you’re bringing to a trader’s attention.
Hopefully, this gives you a general idea of how a sell-side equity derivatives desk works and what it does. Because equity derivatives are so popular with regular people, I think most of them have the wrong idea about what the desk does and how they make money. Now letss get into some questions.
Getting hired as a derivative trader is no easy feat. Competition is fierce for these lucrative and fast-paced roles in investment banks hedge funds, and proprietary trading firms. You’ll need to demonstrate an intricate understanding of complex financial instruments, quick analytical skills and the ability to thrive in high-pressure trading environments.
This makes the interview extremely challenging Hiring managers design questions to test your technical knowledge, trading psychology, and candidacy as an ideal cultural fit. Advanced preparation is key to stand out from the pack and land the job.
This definitive guide provides tips, sample questions, and answers to help you put your best foot forward and wow interviewers.
Understanding Derivative Trading Interviews
Interviews for derivative trading roles typically comprise two key components
Behavioral Questions
These assess your general suitability for the position. Interviewers evaluate your trading mindset, ability to perform under pressure, risk appetite, work ethic, and motivations. Questions may include:
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Walk me through your investment philosophy and approach to markets.
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Describe a high-pressure situation you faced and how you reacted.
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What attracts you to a career in derivatives trading?
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How do you handle mistakes or losses?
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How would colleagues describe your work style?
Technical Questions
These aim to gauge your functional expertise and technical grasp of derivatives and markets. Expect questions on options, futures, swaps, volatility, risk management, regulations, current trends, and valuation models. For example:
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Explain how you would price and hedge an exotic option.
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What are the main market risks when trading derivatives and how do you mitigate them?
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How does an increase in implied volatility impact options pricing?
Thorough preparation and practice are key to deliver winning responses that highlight your talents and knowledge.
7 Winning Answers to Common Derivative Trading Interview Questions
Let’s look at some frequent derivative trading interview questions along with sample responses:
Q1: What attracted you to a career in derivative trading?
This question tests your motivations and helps assess your understanding of the role.
Sample Answer: The constant dynamism and high-impact of derivatives trading excites me. It requires making complex decisions under extreme time pressure which plays to my strengths in analytical thinking and data synthesis. I’m drawn to the thrill of reacting to rapidly evolving markets and executing strategic trades with significant profit potential. Trading also enables creative self-expression through designing original strategies. I enjoy the intellectual stimulation of continually learning about new instruments and innovations in the field. The meritocratic nature of the job is very appealing – success depends on your talent and effort. For these reasons, I’m committed to pursuing a long-term career as a derivative trader.
Q2: Walk me through your approach for pricing and hedging an exotic option.
This complex question evaluates your functional expertise in applying trading principles.
Sample Answer: Pricing exotic options requires advanced models beyond Black Scholes since they have path-dependency and complex payoffs. I would use a Monte Carlo simulation to value the option by generating numerous random stock price paths while incorporating the specific exotic features. The average discounted payoff across simulations yields the fair value.
For hedging, I would analyze the option’s sensitivities – delta, gamma, vega etc. – and construct a dynamic portfolio of spot, futures, and vanilla options to offset them. As the hedge ratios change over time, I’d rebalance based on regular recomputation. Blending the pricing model with sensitivity-based hedging allows me to actively manage risks. I’d also run stress tests to ensure the hedge works under extreme market conditions. Ongoing monitoring and adjusting is crucial for effective hedging.
Q3: A key risk management report you rely on shows drastically incorrect numbers – how would you respond?
This evaluates your problem diagnosis abilities and crisis management skills.
Sample Answer: Firstly, I would verify the severity of errors by rigorously checking the risk report against secondary data sources and pricing models. Once confirmed, I would escalate the issue to senior management and call for urgent troubleshooting. As an immediate control, I would recommend avoiding large new positions or restructuring existing trades until resolving the problems.
To investigate the root cause, I would gather inputs from multiple teams involved in generating the reports – quantitative analysts, developers, data feeds etc. By tracing the workflow and technology stack, I’d identify the potential failure points. If it’s a system bug, I’d get technical teams to review the code and quantify the downstream impacts. For data issues, I’d verify formula integrity, refresh feeds, and reprocess calculations. Rapid collaboration is key to diagnose and rectify errors in critical risk infrastructure. I would provide regular updates to stakeholders on progress.
Q4: How do you ensure you are constantly developing your derivatives knowledge and skills?
Hiring managers look for proactive learning beyond formal requirements.
Sample Answer: Due to continuous product innovation and market evolution, I recognize the importance of lifelong learning in derivatives trading. I regularly study new academic research and analyses published by experts to expand my theoretical knowledge. I also constantly evaluate trading strategies from different firms to improve my playbook. Attending industry conferences allows me to stay updated on latest trends and connect with experienced professionals.
Within work, I spend time understanding derivatives valuation models developed by our quant team beyond just using them. I also take courses on programming, data analysis and machine learning to progress my technical abilities. Staying curious and open-minded is key. My learning mindset involves reading diverse resources, listening to podcasts, and identifying personal knowledge gaps to fill. I consider my formal education a foundation to build upon rather than an endpoint.
Q5: Describe your most successful trade – what was your reasoning and decision process?
This provides insights into your financial analysis skills and intuitive abilities as a trader.
Sample Answer: My most profitable trade was shorting AAA-rated mortgage-backed securities in early 2007. At the time, market sentiment was highly positive on MBS. However, my analysis of loan origination patterns and lender practices made me skeptical about future default rates, especially in subprime pools.
Rather than rely on ratings, I built a stress test model incorporating higher delinquencies. The results indicated severe tail risks not priced into these bonds. To isolate my signal and minimize wider market correlation, I focused on specific MBS tranches and avoided overexposure. The trade paid off enormously over the next year as the global financial crisis unfolded, validating my original thesis.
This success taught me the value of fundamental research, conviction in my insights, and ignoring market narratives without evidence. I now incorporate forward-looking macroeconomic analysis more rigorously in my trade decisions.
Q6: How do you ensure consistent performance under high-stress environments?
Trading involves constant ambiguity and pressure, so interviewers evaluate your resilience.
Sample Answer: Thriving under high-stress is crucial for trading success. I leverage multiple strategies to deliver consistent performance irrespective of environment. Firstly, I prepare for volatility by visualizing stressful scenarios and planning contingencies beforehand. This prevents panic reactions when they occur. Secondly, I lean on my rigorous training and backtested strategies to make decisions confidently amidst chaos.
Maintaining positive self-talk is vital – I reframe anxiety as excitement and focus on opportunities. Getting regular exercise and quality sleep ensures my mind remains sharp and focused when challenges inevitably emerge. Staying connected with mentors provides support and perspective. Finally, upholding stoic detachment from outcomes while pursuing excellence in execution sustains my consistency. I accept stress as integral to trading but do not allow it to derail my performance.
Q7: You take a large trading position but the market moves rapidly against you – how would you respond?
This evaluates your risk management abilities and grace under fire.
Sample Answer: If caught on the wrong side of a market swing with a large position, I would resist panic and rely on my contingency plan. The first priority is damage control – I would hedge against further losses by taking offsetting positions. Simultaneously locking in smaller incremental gains elsewhere allows me to remain calm.
I would analyze the fundamentals driving the move to assess if it is a temporary correction or regime change. Accordingly, I would set thresholds where I cut losses if it continues trending against me. Seeking a second opinion from senior traders often provides perspective. Throughout the process, I’d communicate transparently with stakeholders and own the outcome.
Although painful, such experiences are invaluable learning opportunities. I would later examine my premise, risk estimations and position sizing to improve. With disciplined review and a growth mindset, overexposure enables honing my risk management abilities.
How to Prepare for Derivative Trading Interviews
With diligent preparation, you can tackle any complex question with grace and impress interviewers. Here are some top tips:
Master the fundamentals – Ensure you have a strong grasp of key concepts like volatility, options Greeks, pricing models, hedging strategies and regulations. revisit textbooks, analyze tracer transactions, and speak to traders to fill knowledge gaps.
Research the firm – Thoroughly analyze the institution’s business model, product offerings, market position, financials, and strategic priorities. This enables contextualizing your responses.
Analyze current markets – Brush up on major themes impacting derivatives – inflation, interest rates, geopol
When is gamma at its lowest?
Gamma tends to be at its lowest when the option is very OTM or very ITM. Gamma is highest when you’re at an ATM because you’re constantly moving between being in and out of the money.
To put it another way, your delta hedging needs don’t change much as you move further into or out of the money.
Remember that what were measuring here is the rate of change. To put it another way, the rate of change of gamma is highest when ATM because your delta hedging needs will change the most with any small change in the underlying.
But if you’re far out of the money (OTM) or in the money (ITM), small changes won’t make you need to change the rate of your delta hedging.
Like how when you’re driving on the highway, going up or down 5MPH doesn’t make a big difference. In a school zone, on the other hand, you’ll really know if you’re 5MPH over or under the speed limit.
What does implied volatility really mean?
Implied vol can be thought of as being backwards looking. Like when someone asks you how much oil is in your car—you have to put the dipstick in and check.
Simply put, implied volatility is the volatility built into the actual dollar price of an option. You don’t use an assumption to figure out volatility; instead, you look at how the market is trading to figure out how volatile it needs to be to give that market price.
If it makes more sense to you, you could think of implied volatility as the volatility we see in a given option in the “real world.”
Derivative Analyst Interview Questions
FAQ
What questions are asked in a derivative interview?
What are the 4 main derivatives?
What are the basics of derivative trading?
What questions do interviewers ask about derivatives?
Here are a few derivatives interview questions that interviewers might expect you to answer: 1. What do you understand by the term derivatives? Interviewers might ask this question if they want to gauge whether you possess a basic understanding of the subject. Give a concise response to show that you understand the subject.
What is a derivatives analyst interview question?
The interviewer is trying to gauge the Derivatives Analyst’s understanding of the role and what it takes to be successful in it. This question allows the interviewer to get a sense of how the Derivatives Analyst views the skills necessary for the job and whether they are in line with what the company is looking for.
How do I get a job as a derivatives analyst?
Before you can be hired as a derivatives analyst, you’ll likely need to go through a job interview. One way to prepare for this important meeting is to learn how to answer derivatives analyst interview questions before talking with an interviewer.
Why should you ask a ‘derivative trader’ a question?
A question like this helps hiring managers assess your ability to communicate complex financial concepts in simple, layman’s terms. As a derivative trader, you’ll often have to interact with a broad range of individuals, some of whom may not have an in-depth understanding of finance.
