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Trading is not stressful at all

The sales and trading interview is meant to test for finance knowledge, market interest and ability to handle stress. For sales, interpersonal skills and the ability to communicate why a trade makes sense to a client is important. For trading, being calm and remaining rational is key. Questions will be rapid fire and test a candidate’s thought process.

While investment banking interviews are less structured and can be memorised for many processes, sales and trading requires intuition and is not formulaic because there are simply too many permutations for trading questions where the candidate is expected to have a view for someone to not live and breathe the markets (where is oil/gold/Apple/S&P 500/Brazilian Real going in the next 3/6/12 months and what has caused the recent price action in the last 3/6/12 months and would you short or buy it and if you had to use a derivative which one would you use?).

Integrity is also increasingly important due to rogue trader blow ups and reputational risk stemming from non-finance related activities that have become Hollywood cliches.

Behavioural Interview Questions

The trading floor is an intense work environment and S&T professionals need to be sure that a candidate can be trusted to do work effectively and is reasonably intelligent (especially for quantitative roles). Sales, trading and structuring demand different personalities.

Everyone has to be smart (with sales leaning more towards EQ, but sales teams stress getting a CFA as a means of bolstering credibility), but salespeople have to be good communicators with an understanding of markets while traders will need to convey they have well-reasoned views and are calm under stressful situations. Structurers are expected to be more cerebral.

Getting the right person is more important for S&T than it is for investment banking, as investment banking has several checks and balances along the way that make it difficult for a junior team member to directly lose money for the team. In S&T, one incorrect trade ticket and a bank can lose money in the millions.

On the trading floor, you always need to have a view.

Why are you interested in finance?

This needs to convey an interest in markets and what drives your interest.

Why should we hire you?

This is a rehash of the 3 strengths question. You should outline your three answers A, B and C before going into supporting statements. Anything that supports a passion in finance should be discussed in your answer (e.g. you follow financial news, you have a personal portfolio, you were in an investing club etc.). Keep in mind that anything mentioned may be tested.

What do you do for fun?

Extracurricular activities is a common way for interviewers to judge fit. If you do not do anything outside of academics, you should find a hobby/sport as soon as possible – team sports are especially valued. This is especially important for the trading floor. You will need to follow a sport.

Walk me through your resume.

Explain how your work and educational experience have progressively led you to this role in 30 seconds in a structured manner.

I went to Ivey and was in the Western Investing Club and was on the Dean’s Honour List taking courses ABC. I worked at Deutsche last year in Equity Derivatives Trading where I did XYZ including work a turret and memorize everyone’s coffee in various permutations (2 creams 1 sugar, 2 creams 2 sugars, cinnamon and lemon) and I read all of Warren Buffett’s shareholder letters in my spare time and have no friends.

Why did you not get a sales/trading position out of school?

You need to prepare a valid reason for not getting a sales/trading role straight out of university. Spinning an interesting narrative could give you an advantage over the conventional candidate. If this group rejected you before, that strategy does not work and you have to show your hunger in coming back.

There was a great opportunity to do something in an industry I was interested in. However, I found that I enjoyed _____ the most and as I am interested in (sales/trading) outside of work and liked the material in the CFA.

Why did you choose to go to your university?

If you went to one of the target schools, you should be in good shape for this question. Otherwise, you need to justify your choice and persuade the interviewer to hire you instead of a Waterloo math whiz.

Why did you want to work for our firm?

You should know some key facts (eg. market cap, CEO) about the firm you’re interviewing for, a good place to start is our industry guide. Generally, each bank has a group that they’re known for, it is important to know what that is.

When the CEO is particularly famous, you may be asked “What do you think about James Gorman’s leadership?” in which case you must be well equipped with some knowledge of his recent interview with Bloomberg, the Times or the New Yorker.

What books have you read?

Do you read books? Well you should. It’s ok to say something unique like Capital in the Twenty-First Century that is related to industry as well as to say Battle Hymn of the Tiger Mother as long as you are willing to have an intelligent conversation about the themes and why it was of interest. Cliches are not good. Harry Potter is not good.

If you are interviewing for a specialized product, it is worthwhile to mention something in the space provided you know what it is about (if you are interviewing for commodities, The Prize by Daniel Yergin is good).

What does a trader do?

Review and memorize the key points in our sales & trading guide.

How risky are you?

One of the most important attribute to a trader is being able to manage risk – taking on just the right amount of risk to balance profit and loss. Be ready to provide an example that demonstrates your risk assessment and management skills.

Technical Interview Questions

Technical interviews for S&T are much less streamlined and predictable than investment banking technical questions. S&T will come with many open ended questions where the “correct” answer is one where there is a view that is supported by reasonable arguments – whether or not XYZ actually goes in that direction is irrelevant (and post-interview, regardless).

Different desks will ask different questions, but the interview will usually include questions relating to that particular trading product.

Having a good grasp of accounting for derivatives, when derivatives are used and what drives asset prices are key to making a good impression.

Equity Markets Interview Questions

What are dividends?

Dividends are periodic cash payments distributed to shareholders. Both common and preferred shareholders can receive dividends, but a firm must pay preferred shareholders first before common shareholders can be paid.

What are stock splits?

Stock splits divide a company’s shares into fractions, usually of equal value. This is usually done when the company’s stock price increases significantly. A split ensures that the company’s shares remain affordable and therefore liquid (anyone has the capacity to buy 1 or more shares in the company).

Alternatively, when stock prices drop precipitously to become penny stocks, respectable firms will generally undergo a reverse stock split to stem volatility.

What is a stock buyback/share repurchase?

Stock buybacks are another way for companies to return money to its shareholders by buying back stock in the secondary market. For equity capital markets and equity derivatives you may be expected to know about Normal Course Issuer Bids and Substantial Issuer Bids.

Tell me about a stock in your portfolio.

If you mention that you have a personal portfolio, this may be a question that comes up.

If you are an investor, be prepared to pitch a few stocks, and why you invested in the stocks at the time you did. If you are a trader, be prepare to outline the factors that drive your trading decisions. Short-term investment decisions are generally more appropriate for a trading interview, and will focus on macroeconomic trends and themes.

Pitch me a stock that you would buy or sell now.

A variant of the “pitch me a stock” question, this requires you to pair a stock pitch with current market conditions. You should keep up with current events with the WSJ/Financial Times/Economist.

You need to keep your pitch brief, as traders/salespeople have limited attention spans, the general rule is ~1 minute or less.

You should also be prepared for follow-up questions such as “what is your investment horizon and why?”.

Pitch me three stocks.

This question tests your interest and the depth of your knowledge in the stock market. You should prepare at least 3 stock pitches prior to the interview.

What are 3 significant things that happened in the markets this past week?

Traders are looking for someone intellectually curious who will be engaged with the drivers behind the work. Unlike investment banking which tends to be more regional, markets and products are global and never sleep. No matter where you are in the world, the trading floor is affected by the Federal Reserve, the price of oil and the S&P 500.

As such, the WSJ and Bloomberg are going to be much more relevant than Dealbook. Knowing commodity prices and where the TSX is at is very important when interviewing for a Canadian bank.

Why did the tech bubble burst? Why did the financial crisis happen?

This is rarely asked on the trading floor now as people have short memories, but for nerdier quant groups, this will come up.

Generally, bubbles occur when investor confidence pushes the price of the securities significantly above its fundamental value. The tech bubble is no different. The term “Irrational Exuberance” was coined by Fed Chairman Alan Greenspan to describe this phenomenon.

The sentiment behind this bubble was that the growth of companies with any online presence or loose relation would be astronomical, but a realisation that normal valuation principles still applied and that many of these companies had no feasible timeline to profit (or even revenue) resulted in markets receding. Literature suggests that a Barron’s article sparked the reversal.

If you had $1 million what would you invest in?

There is no single correct answer to this question. You may want to start with describing your risk tolerance based on your financial position and your expected outlay. Then, based on the current market conditions (stock market, bond market, commodities market), allocate assets based on how far they deviate away from their fundamental levels.

The main thing that the interviewer is looking for is the quality of your thought process and your ability to articulate your ideas.

What if you had to invest that in a single company?

Start the answer the same way you would with the previous question, and transition into a stock pitch. You may need to prepare multiple stock pitches beforehand, see our section on it for more details.

Capital Markets Interview Questions

What is the key difference between a primary market and a secondary market?

Primary markets are where stocks and bonds are issued through investment banks (this includes Initial Public Offerings and Seasoned Equity Offerings).

Secondary markets are where they are subsequently traded by institutions and individuals.

What is a repo?

A repo (repurchase agreement) is a transaction where the seller of a security reaches an agreement to buy the security from the buyer at a later date for a predetermined price. The seller is effectively a lender, loaning the security to the buyer, the borrower.

What is a reverse repo?

A reverse repo is a transaction where the buyer of the security reaches an agreement to sell the security back to the seller at a later date for a predetermined price. As this is simply the other side of a repo transaction, the lending relationship is the same.

If the interest rate in the U.S. increases, how would this affect the USDCAD exchange rate?

The US dollar would strengthen relative to the Canadian dollar, holding all other things constant. Investors will pour into a higher yielding asset assuming no significant delta in risk or expected devaluation.

Empirical evidence suggests that the economy is relatively hotter as well if the central bank is raising rates. Recent Federal Reserve and Bank of Canada actions have supported this.

You may segue into a discussion on purchasing power parity and expectations where you expect the Canadian dollar to appreciate instead, but do not do that.

Should a company issue debt or equity under current market conditions?

The decision is largely influenced by the cost of capital, which is partially determined by stock market conditions and interest rates (remember interest expense is tax deductible). Generally, the company will choose the cheaper financing option (however, there are other factors at play, eg. pecking order theory).

Where do you think the Canadian economy is going next year?

Understanding the current trends in commodity prices (especially oil), unemployment, the stock market, and government policies (fiscal, monetary, foreign etc.) is crucial when answering this question. There is no single correct answer, but speaking articulately on all the relevant points is expected.

What is the current state of interest rates?

You need to know what the interest rates are in Canada and the US, and the consensus on where they’re moving towards. You also need to know who the governor of the Bank of Canada is (Stephen Poloz and his tacky suits), and who the Chair of the Federal Reserve is (Janet Yellen).

You may also be expected to know who the governor of the Bank of England is (Mark Carney) due to London’s relevance in global markets and because he is Canadian. Mario Draghi is the head of the ECB.

What are the objectives of the Federal Reserve?

The main objectives of the Federal Reserve are identified to be “maximum employment, stable prices, and moderate long-term interest rates”. The Fed uses various instruments of monetary policy in order to fulfil their mandate. These include:

  • Open Market Operations
  • Changing the Overnight Rate
  • Changing the Reserve Requirements

What is the difference between currency depreciation and devaluation?

Depreciation occurs in a flexible exchange rate system, where the value of the domestic currency decreases relative to foreign currency. Devaluation occurs in a fixed exchange rate system.

What are the different levels of debt (by seniority)?

This is more of a Debt Capital Markets question.

DIP Financing by debtor-in-possession lenders – unique financing method for a company in bankruptcy usually has seniority over all other types of debt
Senior Secured Debt for secured creditors (a lien on fenced off or circled assets) – bank revolvers and bank debt (term loans), certain bonds
High yield bonds – for unsecured creditors
Subordinated debt
Mezzanine – convertibles bond, convertible preferred, preferred, PIK

What is quantitative easing?

Quantitative easing is a monetary policy instrument used by the Fed to depress interest rates. It is achieved through the purchase of securities from the market, and flooding financial institutions with money to give them more incentive to increase lending.

What are non-farm payrolls?

Non-farm is one of the most important days in the economic calendar and refers to all jobs excluding farm workers, sole proprietorships, private household workers, and military and intelligence employees. The above items are stripped out to give a gauge of the economy’s health.

When should a company buy back stock?

When a company has extra cash, and believes its stock is undervalued. Theoretically, if the company believes that it can make a higher return on its stock than its business, it should choose to buy back stock. Stock buybacks can also be used to signal confidence to investors.

This is also an investment banking question.

Is the dividend paid on common stock taxable to shareholders? For the company?

Dividends paid are taxed as investment income to individuals. For the company, dividend paid is not tax deductible as it comes out from net income after taxes.

This implies double taxation, but there are rules in Canada and elsewhere related to dividend gross-ups and other allowances.

Why would an investor prefer preferred stock over common stock?

  1. Preferred stock retains the upside potential of equity while providing a fixed income-like stream of payments to the stockholder
  2. Preferred stock has a more senior claim over assets than common stock
  3. Preferred stock dividends are taxed at a lower rate compared to interest from bonds

Why would a company distribute its earnings to its shareholders via dividends?

Similar to a buyback, continued dividend distribution signals to investors that the company is healthy. By maintaining the dividend, the company can attract shareholders and funds that prefer dividend stocks, thus boosting its stock price.

What did the TSX close at yesterday?

Similar to “What did the S&P 500 close at yesterday?”, this is a question designed to test your interest in finance. It is important to stay up to date with major market indices.

No one really follows the Dow Jones Industrial Average, but have an idea of where it is (if you read the news you will have a general idea of where megacap stocks are going).

Why could the price of a company’s stock increase when it announced decreased quarterly earnings?

There could be several reasons:
1. The entire market/industry is up on the day, masking any downward pressure on the stock
2. The decreased earnings still beat expectations from investors
3. The decreased earnings are a result of a non-recurring expense, and revenues beat expectations
4. Random fluctuations in the market

Fund X has achieved a 50% return last year, should you invest in it?

You need more information. How was the market/S&P 500 last year? How did other funds perform? What is the strategy of Fund X? How did it achieve the 50% return? Generally, past performance does not guarantee future results, and a longer history of outperformance is required to determine whether a fund a truly superior to its peers.

Which stock has a higher growth potential: Stock A at $5 or Stock B at $50?

It depends. While you might be tempted to answer stock A, the stock price has little to do with a company’s growth potential. Stock A may have a lower price, but that does not necessarily mean it is a smaller, faster growing company. You will need more information about the companies’ operations and revenues.

Why do some stocks pop on the first day of trading after IPO?

Sometimes, companies will complete their offering at a price lower than what the market values the company at. Effectively, the company leaves money on the table, where the difference in the IPO price and the market price (after correction) is captured by the initial shareholders rather than the company. This can be good for the company, as it A) is good publicity, B) appeases initial shareholders and C) makes it easier for the company to raise cash in the future.

What is insider trading?

Insider trading is the buying and selling of securities with material non-public information. As a trader, you may come across information on companies that is not yet public (mergers, FDA approval on a drug etc.). You cannot trade on that information until the company publicly discloses it.

Who is a more senior creditor, a bondholder or a stockholder?

Bonds are always more senior than stocks. This means in event of bankruptcy, before stockholders can claim company assets, bondholders will be paid out first.

Fixed Income Questions

What is par value?

Par value, or face value of the bond, is the amount that the bond issuer will pay the bondholder at its expiry.

What are coupon payments?

Coupon payments are periodic interest payments that the bond issuer will pay the bondholder.

What is bond price?

Bond price is the price that the market is willing to pay the issuer to holder the bond. Bond price depends on its coupon rate, embedded options, default risk, interest rates, and many other factors.

What is default risk?

Default risk, or credit risk, is the risk that the bond issuer will go bankrupt, and cannot pay the full amount owed to its bondholders.

What is default premium?

Default premium is the difference between the yield of a bond and the yield of an identical risk-free bond. The default premium compensates for the issuer’s default risk.

What is credit rating?

Credit rating is given to companies and governments by credit rating agencies (S&P, Fitch, Moody’s, DBRS). The ratings affect borrowing rates and their ability to raise money.

What are the 2 categories of bonds when categorized by credit quality?

  • Investment Grade Bonds – Bonds of high credit rating
  • High Yield Bonds – Bonds of lower credit rating, also known as Junk Bonds

What is PIK?

PIK stands for Paid In Kind, which refers to bonds that are paid by more bonds as opposed to cash.

What are Govies?

Govies are bonds issued by the federal government to support spending. They are the least risky fixed income security, as federal government have the lowest risk of default. They are used as benchmarks for other fixed income securities for pricing.

What are Munis?

Munis are bonds issued by the municipal or state/provincial government (in Canada, Provincial bonds or Provies trade under completely different dynamics than the robust US muni market, as Provies are widely seen to be implicitly guaranteed by the Federal Canadian government).

These bonds are different in that they are generally tax exempt, which means the attractiveness of Munis is a function of the properties of the bond itself and your individual tax bracket. If you are interviewing with a US bank, you will need to know about tax-exempt yields.

Munis do have default risk, as illustrated by the unprecedented recent example of Detroit. That bankruptcy also meant that bond investors had to consider their effective seniority against pensioners and other stakeholders that they ended up ceding haircuts to – influencing the rates lenders are willing to take going forward.

An interesting development going forward will be the City of Chicago – a far more important city globally, and one that has been recently downgraded to Junk by Moody’s.

What are Corporate Bonds?

Corporate bonds are issued by corporates to finance projects or working capital. Corporate bonds can be split into investment grade bonds, or high yield bonds (sometimes called junk bonds), depending on the corporation’s risk of default.

How are bonds priced?
Bonds are priced by discounting all the future cash flows expected from the bond, by a risk adjusted rate.

What are the key differences between a stock and a bond?

A stock represents ownership of a company’s assets after senior claimholders (eg. bond holders). A bond generally has a fixed maturity and pays a specific interest, while stock holders have a residual claim on the earnings of a company after interest expense, and can be paid a dividend. Stock holders typically have voting rights, while bond holders do not.

What is duration?

Duration is the sensitivity of a bond’s price to changes in interest rate, measured in years. Typically, duration is related to maturity in that longer maturing bonds have higher duration.

What is convexity?

Convexity is the sensitivity of a bond’s duration to changes in interest rate. As the relationship between a bond’s price and interest rate is non-linear, it describes how convex the curve is.

What is the yield curve?

A yield curve graphs the relationship between the interest rates and maturities of bonds of the same credit quality. The slope of the yield curve, generally classified into “rising”, “steep” or “inverted”, may be indicative of investor sentiment on the economy. A typical yield curve is rising, with lower short-term interest rates and higher long-term interest rates.

If you believe the interest rate is about to rise, what will happen to the price of bonds?

Generally, bond prices are inversely related to the interest rate, meaning as interest rate rises, the bond price falls.

What is the value of a zero-coupon perpetuity?


What is a basis point?

A basis point is one one hundredth of a percent, it is usually used within the context of fixed income.

Why might two bonds issued by the same company with the same coupon/maturity be trading at different prices?

Embedded options could be a reason for the price difference. Investors are willing to pay more for a putable bond (embedded with a put option) as it protects their downside if interest rates rise. Conversely, investors demand a discount for callable bonds (embedded with a call option), as the issuer has an option to buy back the bond if interest rates plummet.

What are the limits of duration?

Duration can be useful as a measure of price volatility. However, it is limited in that:

  • Duration does not take in account of convexity, and is only valid when the changes in interest rates are small (where convexity plays a smaller role)
  • Duration assumes a parallel shift in the yield curve, so any steepening/flattening of the yield curve reduces the accuracy of duration
  • Duration does not take in account of embedded options such as calls and puts

Which bond has a greater duration: a treasury bond or a junk bond with the same maturity?

The treasury bond has a greater duration, as it carries a lower coupon rate compared to the junk bond.

What is the duration of a zero coupon bond?

As a zero coupon bond has no coupon payments, the duration of a zero coupon bond is simply equal to its maturity. A 10-year zero coupon bond has a maturity and duration of 10 years, while the same conventional bond has a duration of less than 10 years.

There are 2 bonds of similar maturity and coupon, bond A and bond B. Which one should you buy if bond A trades under the yield curve, while bond B trade above the yield curve?

As price is inversely related to yield, Bond B would be trading at a lower price, therefore you should buy Bond B.

Describe the convexity of a callable bond

Callable bonds exhibit negative convexity at lower yields. Convexity is the rate of change of a bond’s duration. As interest rates approach the yield-to-call, the rate of change slows.

A callable bond benefits the bond issuer as it can call or redeem the bond at the issuer’s option for a certain price.

Usually, this happens when interest rates fall and the borrower would benefit from redeeming and reissuing the bond at a lower interest rate. As such, as interest rates fall, the best possible price the bond investor can achieve is the call price.

As a follow up question, an interviewee may be asked about yield to call or how investors need to be compensated for this embedded option (they will need a higher coupon).

Why do yield curves invert?

An inverted yield curve describes a yield curve which slopes downward. It is relatively rare as typically, cost of borrowing increases as maturity increases. Yield curves invert when the market expects short-term interest rates to decline, which tends to occur following periods of tight money/credit.

How can you make money if you expect an inverted yield curve to revert?

A reversion of an inverted yield curve is in essence a steepening of the yield curve, where the slope goes from negative to positive. You would want to put on a curve-steepening trade, where you can buy long-term maturities or short short-term maturities.

How can you make money if you expect a normal yield curve to invert?

You would want to put on a curve-flattening trade, where you can buy short-term maturities or short long-term maturities.

How is bond price related to its yield?

There is an inverse relationship between a bond’s price and its yield. If bond’s price falls, its yield rises.

How would you value a perpetual bond that pays $500 a year?

As there is no lump sum payment at the end, the value of the bond is simply the coupon divided by a risk adjusted rate.

What are the major factors that affect the yield on a corporate bond?

Interest rates and credit risk. The yield is a combination of the interest rate on a US Treasury bond with similar maturity and a risk premium associated with the company.

If interest rates are expected to rise, should you buy a 10 year coupon bond or a 10 year zero coupon bond?

The 10 year coupon bond. Remember the price of the bond is inversely related to interest rates. A zero coupon bond is more sensitive to interest rate changes, therefore its price will fall more if interest rate increases.

Which is less risky: a 10 year coupon bond or a 10 year zero coupon bond?

A 10 year coupon bond is less risky, as you are receiving cash in the form of coupon payments. In event of a default before maturity, you have at least received some money back, as opposed to a zero coupon bond. In addition, the price of coupon bonds is less sensitive to changes in interest rates, therefore you lose less if interest rates rise.

If you believe interest rates will fall, should you buy bonds or sell bonds?

You should buy bonds, as bond prices rise when interest rates fall. The caveat is if the market also believes that interest rates will fall, it may have already priced it in. You should only buy bonds if you believe interest rates will fall more than the market’s expectations.

How does inflation hurt creditors?

Creditors lend money at a fixed rate, and inflation cuts into the returns for creditors. If you are lending out money at 5%, and cost of goods is rising at 2%, you are only really clearing 3%.

If the stock market falls, what might happen to bond prices?

You may expect bond prices to increase.

What is Yield to Maturity?

Yield to Maturity, or YTM, is the yield realized by holding the bond to its maturity.

What is an interest rate collar?

An interest rate collar is the simultaneous sale of an interest rate floor and purchase of an interest rate ceiling or cap. Collars are used by fixed income investors to lock in a range of interest rates, which allows for them to be protected from rising rates while giving up the potential benefits of lower interest rates (remember for bonds, lower interest rates means a higher present value of cash flows and vice versa).

The interest rate cap and interest rate floor must both have the same notional principal (the dollar amount to which the contracted terms are relevant to), and the ceiling/cap must be above the floor strike.

The interviewer can subsequently ask about reverse collars or zero cost collars.

Derivatives Questions

What is a call option?

Call option gives the option holder the right but not the obligation to buy the underlying asset at the strike price before its expiration.

What is a put option?

Put option gives the option holder the right but not the obligation to sell the underlying asset at the strike price before its expiration.

What is a forward contract?

A forward contract is an agreement between two parties, where one party agrees to deliver an asset to the other at an agreed upon price and date. For example, a coal miner can enter into a forward with a power plant, where both sides protect themselves from the price volatility of the underlying asset (in this case coal).

What is a future contract?

A future contract is a standardized forward that trades on an exchange. In return for decreased flexibility, futures provide greater liquidity to the contract holders.

What is put call parity?

Put call parity defines the relationship between a European put option and a European call option. Specifically, a put option with the underlying security gives you the same payoff diagram as a call option with a bond. From this relationship, we get the following formula:

P + S = C + B

P – Put option at the strike price X

S – Underlying security

C – Call option at the strike price X

B – Risk free bond that pays the strike price at the expiration

What is the delta of an at-the-money option?

Delta is the ratio of the change in the price of the option per unit change in the price of the underlying security. When the option is at-the-money, the strike price of the option equals to the price of the underlying security. Assuming the price of the security is equally likely to go up or go down, the delta is 0.5.

Does principal get exchanged in a foreign currency swap?

Unlike interest rate swaps, foreign currency swaps do require an exchange of principal at the outset and the maturity of the swap.

What causes swap spreads to widen or narrow?

The swap spread is the difference between the negotiated and the fixed rate in an interest rate swap. When interest rates are expected to rise, paying fixed and receiving floating becomes more desirable, and the difference between the two widens. The opposite is true for when interest rates are expected to fall.

Describe the convexity of a Mortgage Backed Security

Convexity is negative – once interest rates fall, homeowners will prepay their mortgages, reducing the principal of the investment.

What is a simple option strategy if you expect a swing in price but are not sure on direction?

A straddle (buying a put and call with the same strike or exercise price and expiration date) is best in this situation. This question is somewhat misleading as an investor would only enter into this straddle if they felt that the implied change in price would be much larger than the premiums paid, so if the swing was not large enough this may not be a good strategy.

What has higher absolute rho, a straight bond or an in-the-money convertible?

  • Straight bond – interest rates go up, bond falls
  • Convertible – interest rates go up, and value of call increases so the bond has a higher rho

When would you write a call option on a stock?

When you expect the price of the stock to fall. A call option is a bet on the price of a stock to rise, writing the option is taking the other side of that bet, where the profit is the option premium.

When would you buy a put option on a stock?

Similar to writing a call option, when you expect the price of the stock to fall.

How does a swap work?

A swap exchanges future cash flows (and risk) between the participating parties. Common forms of swaps include interest rate swaps, currency swaps, and credit default swaps.

What is at the money? In the money? Out of the money?

They are terms used to describe the state of the option, namely whether or not the option is worth exercising at the current price of the underlying asset. For call options, when the asset price is above the strike price of the option, the option is in the money. When the asset price is below the strike price, the option is out of the money. For put options, this relationship is simply flipped. For both call options and put options, when the asset price equals the strike price, the option is at the money.

If you are holding a call option on CIBC stock with a strike price of $120 (expiring today), and the stock is currently trading at $100, how much is your option worth? Is it in the money or out of the money?

The option is worth $0, as exercising the option would allow you to buy CIBC stock at $120, and the stock is currently trading at $100. You would incur a loss of $20 if you exercise, therefore you would rather let the option expire. The option is currently out of the money.

Which would be more valuable: a call option on Facebook or a call option on Walmart? (Assuming all else is equal)

A call option on Facebook is more valuable. You need to recognize that an option’s value is partially driven by the price volatility of the underlying asset, as high volatility increases the chance of the option being in the money at some point before expiration.

Which would be more valuable: a January put option on Suncor or a February put option on Suncor? (Assuming all else is equal)

The February put option. An option’s value is also driven by the expiration date of the option, as options with longer expiries have more chances for the option to be in the money.

When would a trader seek to profit from shorting futures?

The trader in the short position believes that the asset price will decrease (below market expectations).

How do interest rates affect the price of options?

  • Call options: higher interest rates increase value
  • Put options: higher interest rates decrease value

What is the difference between futures and forwards?

Futures are standardized and traded on exchanges, while forwards are more flexible and traded over-the-counter (OTC).

What is a mortgage backed security?

A mortgage backed security (MBS) is an asset backed security (ABS) secured by mortgages.

To understand why this is a relevant product, an investor looks at the value of a standalone mortgage versus a pooled mortgage trust. If an investor has one individual mortgage, the standalone default or prepayment risk is high. If there are thousands of mortgages, the defaults will blend into an effective interest rate on the MBS.

Mortgages themselves are an illiquid security. Packaging mortgages through securitization provides a liquid product with a higher yield (although less than the yield of an individual mortgage). Usually, MBS are overcollateralized (secured by a greater notional amount of mortgage loans than the principal on the security) to enhance the security. Investment banks will take a cut/fee in structuring the MBS.

Economics Questions

What goes into GDP?

Consumption + Investment + Government Expenditure + Exports – Imports
or C + I + G + Net Exports

How would a Presidential impeachment affect interest rates?

Generally, political instability will lead to fears that the economy will go into recession, and the Federal Reserve (or Bank of Canada) combat those fears with monetary expansion (lowering interest rates or injecting money into the economy).

How does the government combat inflation or hyperinflation?

The government has fiscal and monetary tools to maintain a stable long term inflation rate. Fiscal policies involve taxes and government spending, while monetary policies involve interest rate changes, reserve requirement changes, and open market operations. In event of higher than expected inflation, the government increase tax, reduce spending, increase interest rates or increase reserve requirements to slow down growth in the economy.

If unemployment is low, what happens to inflation and interest rates?

Low unemployment means high level of economic activity, therefore inflation and interest rates both go up.

Do you think the Bank of Canada will cut or raise interest rate over the next year?

You should have an understanding of why the prior interest rate cuts/raises were done, and the market’s consensus on what the Bank of Canada will do next.

If Canadian dollar weakens, what will happen to interest rates?

Generally, interest rates will rise as a weaker currency drives inflation through higher prices on imported goods.

If inflation rates rise, what will happen to the Canadian dollar?

It will weaken.

If interest rates in Japan decreases relative to interest rates in Canada, what will happen to the Yen and the Canadian dollar?

The Yen will weaken relative to the Loonie/Canadian Dollar.

If inflation rates in the UK rise relative to inflation rates in Canada, what will happen to the Pound and the Canadian dollar?

The Loonie will strengthen relative to the Pound.

What is the difference between currency depreciation and devaluation?

Depreciation occurs when a country allows its currency to lose value in the currency markets, while devaluation occurs in fixed exchange rate systems.

What happens to big Canadian multinationals when Canadian dollar weakens?

Canadian multinationals that rely on export will see its sales/earnings increase as Canadian dollar weakens.

What factors affect exchange rates?

  • Interest rates and interest rate expectations
  • Inflation and inflation expectations
  • Capital market equilibrium

Related Reading for Sales & Trading Interviews

InterviewsInvestment Banking Modeling Test / Case Study · Stock Pitch: Long Canada Goose (TSE:GOOS) · How to Quickly Research a Company or Industry · Stress Interview Questions for Investment Banking · How To Answer: “Do You Have Any Questions For Us?” · Things Not to Say in an Investment Banking Interview · Encouragement before Full-Time Recruiting for 2018 · Macro Brief for Interviews on Equities · How Long Before Hearing Back from an Interview? · How to Answer “Why Investment Banking”? · 2 Common Interview Mistakes · How to Show Your Passion for Finance · Off-Cycle Investment Banking and Finance Recruiting · Landing an Investment Banking Interview in Canada ·

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