here are some questions i have asked in interviews / have been asked in interviews / would ask / enjoy asking.
Interest Rates
· What is a swap? What kinds of swaps are there? How would you price an interest rate swap?
· What is the difference between a swap rate and a swap spread?
· When one is trading a rate, one is taking which type of risk?
· Explain what duration and convexity are.
· What is a swaption? What is a Bermuda option? How do we calculate the risk neutral price of a Bermuda option? What/How/Why is backward induction, Bellman’s equation and what/how/why do we use it to find the risk neutral price of a Bermuda option?
· What is a cancellable swap? How can you decompose a cancellable swap into a swap and an option? How would you price it?
· What are the two main classes of interest rate models? Explain the pros/cons of each.
· What is mean reversion? Specify a process that captures mean reversion and solve it? Why does it matter whether interest rates follow mean reversion?
· What are the different types of simulation to implement interest rate models?
· How do we reduce simulation noise?
· What is the SABR model? What do the parameters mean? Is the sabr model a good model for interest rates? Explain how, if you were a trader, you would determine the parameters? Now do the same if you were a quant.
· What is a constant maturity swap?
· What is the market practice for pricing interest rate products?
· What are some uses of interest rate options?
· What is OIS? Compare the use of ois discounting as opposed to LIBOR discounting.
· What is an Asset Swap Spread? What is a Z-spread? What is a V-spread? Why are these spreads useful for interest rate options? Can they be traded? If so, how would you trade them?
· Explain the future/forward convexity adjustment?
· Who is the buyer/seller/lender/borrower in a repo transaction? What about in a reverse repo transaction?
· What is the problem with modeling instantaneous forward rates as a lognormal process?
· Are derivative prices relative prices or absolute prices? Should the expected PnL change given which numeraire is chosen? Explain the connection to martingales?
· What is stochastic discounting? Explain what a forward measure is?
Foreign Exchange
· What does the statement ‘I buy dollar swissy’ mean?
· Explain the difference between a EURUSD call option and a EURUSD put option?
· What would it mean if EURCHF = 1.2 ?
· What is a pip / basis point? How many pips constitute a big figure?
· If EURCHF = 1.3 yesterday, EURCHF = 1.2 today and EURCHF = 1.5 tomorrow, has CHF strengthened compared to EUR?
· What is purchasing power parity?
· What is triangular arbitrage?
· What is the bid ask spread?
· Explain, through arbitrage-driven arguments, how to price an FX forward rate?
· Explain how to commit FX forward-spot arbitrage? How does it connect to ‘buy low sell high’?
· If EURCHF = 1.25, the 1Y EUR interest rate = 3%, the 1Y CHF interest rate = 5%, what does this mean? What will the 1Y forward rate be? What is interest rate parity?
· What is inflation and what causes inflation?
· What is a future, in an FX context? What are the differences FX futures / FX Forwards?
· What is the difference between a FX swap, a cross currency swap and a cross currency interest rate swap?
· What is the difference between an FX outright forward and a FX spot-forward swap?
· Explain how a cross currency swap can be related to a series of FX forwards?
· Why do institutions care for FX swaps?
· Do FX American options cost more than FX European options? Why / why not?
· What is the difference between simple interest and compound interest? Why is this question relevant to FX?
· What is put call parity for FX options?
· What is delta, gamma, rho, theta, vega?
· What is in the money, out of the money, at the money for FX options?
· What is vanna and volga? Why are they relevant to FX Options?
· What is implied volatility? What is the market practice for pricing FX options?
· What is an At The Money Forward? Which currency pairs have the ATMF convention? Why?
· What is the volatility surface?
· What is an exotic FX option? Why do companies purchase exotic FX options?
· Is the Black Scholes model is rejected by how FX options are quoted? If so, how can you fix the black scholes model to accurately price FX options?
· What is a call spread? what is a straddle? What is a risk reversal? What is a strangle?
· What is a digital option? What is a barrier option? Explain why are both popular in FX markets.
· How can you decompose a European barrier option into a vanilla and a digital? Why?
· What is the delta, gamma, rho, theta, vega, vanna, Volga for a vanilla, a digital and a barrier?
· Which Greek parameter is the most important for FX options?
· What was Bretton Woods? What was Bankhaus Herstatt? Why are they relevant for FX?
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