Generic Mining Finance and Commodities Trading Interview QuestionsPrep List Following questions Mining project finance and valuation Macquarie Bank deals done Derivatives pricing evaluation, trading process and solutions.

1. Suppose depreciation goes down by $10. What will happen to financial statements? Start from Income statement?2. How do you compute EBITDA? and what is it?3. Tell me about any financial ratios that you know?4. How do you analyse the profitability of a given company5. Why my major? Why my school? Why would I be a good fit for the job? Wanted to know how acquainted I was with commodities markets and recent deals that Mac. had done.6. Standard option pricing and hedging questions, followed by a discussion regarding the greeks.7. What are the factors involved in the decline of oil prices and what can push them back up?8. Current financial issues and regulations9. Algorithm to find all power sets of a set10. Pitch your favorite long idea and short idea.11. Walk me through an LBO...12. Why do you want to work specifically at Macquarie?13. Tell me something about you that is not on your resume14. Two people can produce two bikes in two hours. You are in need of 12 bikes. How many people will it take to produce these 12 bikes in 6 hours?15. What is something on your resume that you are most proud of?16. Do you find yourself to be more of a quantitative or qualitative thinker?17. How many marriages occur every year in London?18. What is your favorite industry and how do you value a company?Pitch me something... (Hard on the spot)19. If you had a boss who micromanages you to the point of being annoying, how would you go about handling the situation?20. One was a cook can make 2 large cakes per hour or 20 small cakes. We have the kitchen for 3 hours and need 20 large cakes and 220 small cakes. How many cooks do we need?21. How do you find WACC for a private company22. When to use stock vs cash.23. A lilypad doubles in size each day. In 28 days, the lilypad will cover the entire pond. In How many days will the pond be half covered? When 25%?24. Square root 100000? 1000? 1000025. How would you value a coal mine?26. What's the revenue of an airport?27. Value and form the capital structure for a toll road with an EBITDA of $30M 28. We are pitching to a client who sells batteries, but has been experiencing a decline in sales lately. What recommendations should we make to help them boost their sales?29. Failure of teamwork experience30. How many train stations are there in New York City?31. Describe a situation where things didn't go as you expected in a team-based project, and what was the outcome32. Describe a situation where you had to implement a new idea, and how did you go about it33. An example of a bad team that I had to work with34. What's your opinion about private equity in china?35. Can you do valuation analysis?36. Run us through the process of pitching and closing a deal37. How do u cope with stress38. What sector has performed the best in the past 20 years? How has the mining sector changed in the last 10-20-50 years?39. Valuation of illiquid pool of investments40. Tell us of something most people don't know about our company. 41. Describe CDS? What factors change the spread? 42. Go through NORMAL DISTRIBUTION43. BLACK SCHOLES44. List the steps that you would take to make an important decision on the job. 45. Describe how you would handle the situation if you met resistance when introducing a new idea or policy to a team or work group.46. How would you explain the internet to your grandmother? 47. How would you confront a loose but loyal subordinate? 48. How would you value this building? 49. How to model PIK50. OTC Contracts?51. Hedge Books?52. Tell us about a time when you had to work alone on a project? How did you manage your time to stay on track? What we the outcome of the project?53. Tell us about a time when you had to make a change? How did you go about it and what was the result?54. Have you ever had to deal with conflicting deadlines? How did you decide what to prioritize?55. Comparable company analysis? Industry average? comparison by size, market cap?56. Walk me through a discounted cash flow model?A discounted cash flow model, or DCF, attempts to value a company based on the present value of its future cash flows, as well as the present value of its terminal value. The discount rate is determined most commonly by the weighted average cost of capital, or WACC. Here is how you calculate WACC in a DCF model: Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 -- Tax Rate) + Cost of Preferred * (% Preferred)A precedent transaction analysisUses past transactions of other companies to help determine the current valuation of the company being analysed. This is mostly used in merger and acquisition deals.Step 1: Select the comparable companies: The selection should be based on each company's sector, size, products and services, who the target customer is, and location of business.Step 2: Probe and compare the financials, and select the key trading multiplesGo through each of the comparable companies' financials and compare the cost of the deal was. Then go through the financials of the target company at the time of the acquisition, and note key comparable multiples such as Enterprise Value / Sales, Stock Price / EPS, among others.Step 3: Determine valuationAfter comparing the financials and multiples, use step three to properly value the company being analysed. For example, use the predicted EBITDA of your company compared to the EBITDA multiple of past deals to approximate the value 57. What makes a good LBO candidate?This is Macabacus' list of characteristics that define the ideal LBO candidate. Strong, predictable operating cash flows with which the leveraged company can service and pay down acquisition debt. Mature, steady (non-cyclical), and perhaps even boring Well-established business and products and leading industry position Moderate CapEx and product development (R&D) requirements so that cash flows are not diverted from the principle goal of debt repayment Limited working capital requirements Strong tangible asset coverage Undervalued or out-of-favour Seller is motivated to cash out of his/her investment or divest non-core subsidiaries, perhaps under pressure to maximise shareholder value Strong management team Viable exit strategy58. What is the difference between the yield and rate of return on a bond?Return refers to what an investor has actually earned on an investment during a period of time in the past. Yield is forward-looking,as it measures the income that an investment earns while it ignores capital gains. It is used to measure bond or debt performance, and in most cases the return of a bond will not equal the yield.59. What is beta?Beta is a measure of the riskiness of a stock relative to the market. The market has a beta of 1.0, and a stock with a greater than 1.0 beta is perceived as more risky than the market while a stock with a beta of less than 1.0 is perceived to be less risky than the market. Beta is also used in the capital asset pricing model (CAPM).60. Describe duration and convexity.Duration measures the sensitivity of a bond to a change in interest rates and is expressed in a number of years. Always, always remember that rising interest rates mean falling bond prices and vice versa. Convexity is a risk-management tool that measures the relationship between bond prices and yields, and it explains how the duration of the bond changes as the interest rate changes.61. What are the benefits and negatives to raising equity vs. debt?Advantages of debt compared to equity: Debt does not dilute an owner's ownership. A lender is only entitled to repayment of the principal of the loan and its interest, with no claim on future business profits. Principal and interest obligations are easier to plan for. Interest can be deducted on a tax return. State and federal securities law and regulations are not required to raise debt. Bondholder meetings are not held, a vote of bondholders is never taken, and messages to bondholders are unnecessary.Advantages to equity compared to debt: Debt must be repaid at some point. High interest costs during poor financial times increase the risk of insolvency. It is hard to grow for higher leveraged companies with larger amounts of debt rather than equity. Cash flow is needed for principal and interest payments and are included in budgets, which cannot be said for equity. Investors and lenders consider companies riskier with a very high debt-equity ratio. Companies usually have to pledge assets of the company to lenders, with owners of the company often being required to guarantee loan repayment.62. To prevent arbitrage, the price of the asset must equal the price of what?First, understand arbitrage. It is the simultaneous purchase and sale of an asset, made in order to profit from the difference in price. It essentially exploits the price differences in inefficient markets. To prevent arbitrage, the price of the asset must equal the price of its replicating portfolio.63. Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?A: Capital expenditures are capitalized because of the timing of their estimated benefits the lemonade stand will benefit the firm for many years. The employees work, on the other hand, benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense.64. Walk me through a cash flow statement.A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities. Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities. Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities. Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash. Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance.65. What is working capital?A: Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months.66. Is it possible for a company to show positive cash flows but be in grave trouble?A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward.in the pipeline67. How is it possible for a company to show positive net income but go bankrupt?A: Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans.68. I buy a piece of equipment; walk me through the impact on the 3 financial statements.A: Initially, there is noimpact (income statement); cash goes down, while PP&E goes up (balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement) Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by depreciation, while retained earnings go down (balance sheet); and depreciation is added back (because it is a non-cash expense that reduced net income) in the cash from operations section (cash flow statement).69. Why are increases in accounts receivable a cash reduction on the cash flow statement?A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds.70. How is the income statement linked to the balance sheet?A: Net income flows into retained earnings.71. What is goodwill?A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business.Lets walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m. Acquirer records cash decline of $500 to finance acquisition Acquirers PP&E increases by $100m Acquirers debt increases by $50m Acquirer records goodwill of $450m72. What is a deferred tax liability and why might one be created?A: Deferred tax liability is a tax expense amount reported on a companys income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually payslessin taxes to the IRS than they show as an expense on their income statement in a reporting period. Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS.73. What is a deferred tax asset and why might one be created?A: Deferred tax asset arises when a company actually paysmorein taxes to the IRS than they show as an expense on their income statement in a reporting period. Differences in revenue recognition, expense recognition (such as warranty expense), and net operating losses (NOLs) can create deferred tax assets.74. How many degrees (if any) are there in the angle between the hour and the minute hands of a clock when the time is a quarter past three? [Typically asked during investment banking interviews for entry level investment banking graduate jobs] 75. Find the smallest positive integer that leaves a remainder of 1 when divided by 2, a remainder of 2 when divided by 3, a remainder of 3 when divided by 4, ... and a remainder of 9 when divided by 10 [Asked during interviews for quantitative finance jobs]76. Two standard options have exactly the same features, expect that one has long maturity, and the other has short maturity. Which one has the higher gamma? [Typically asked during interviews for bank derivatives trading jobs] 77. How do you calculate an option's delta? [Asked during investment banking interviews for derivatives trading jobs] 78. When can hedging an options position make you take on more risk? [Typically asked during interviews for trading jobs] 79. Are you better off using implied standard deviation or historical standard deviation to forecast volatility? Why? [Asked during interviews for quantitative finance jobs] 80. Two players A and B play a marble game. Each player has both a red and a blue marble. They present one marble to each other. If both present red, A wins 3. If both present blue, A wins 1. If the colours do not match, B wins 2. Is it better to be A or B, or does it matter? [Asked during interviews for quantitative finance or derivatives jobs]81. What is the difference between default and prepayment risk? [Typically asked during interviews for credit jobs / risk management jobs] 82. Estimate the annualdemand for car batteries [Typically asked during interviews for corporate finance jobs, mergers & acquisition banking jobs or consulting jobs] 83. Why is the Income Statement not affected by changes in Inventory? The expense is only recorded when the goods associated with it are sold (COGS) 84. How do the 3 statements link together? Net income from Income Statement flows into Shareholders' Equity on the Balance Sheet and into the top line of the Cash Flow Statement. Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement. Cash Flow investing and financing activities affect Balance Sheet items such as PP&E and Shareholders' Equity85. If a company incurs $10 (pretax) of depreciation, how does this affect the three financial statements? 1. Income Statement: Depreciation is an expense, so EBIT declines by $10. Assuming a 40% tax rate, net income declines by $6.2. Cash Flow Statement: Net income decreases by $6 and depreciation increases by $10, meaning that cash flow from operations increased by $4.3. Balance Sheet: Since cumulative depreciation increased by $10, Net PP&E decreases by $10 (asset). Since cash flow increased by $4 on cf statement, cash increases by $4 (asset). The $6 reduction of net income causes retained earnings to decrease by $6. 86. If depreciation is a non-cash expense, why does it affect the cash balance? It is tax-deductable. Since taxes are a cash expense, depreciation affects cash by reducing the amount of taxes you pay. 87. Where does depreciation usually show up on the Income Statement? It could be a separate line item. It could be embedded in COGS or Operating Expenses 88. A company makes $100 cash purchase of equipment on Dec. 31. How does this impact the three financial statements this year and next year? Year 1Assume FY ends Dec. 31. Why? No depreciation for the first year. IS: Capital expenditure so no affect on net income, i.e. no change on IS.CFS: No change in net income = no change in cash flow from operations; however, $100 increase in capex ($100 use of cash in cash flow from investing activities) = $100 use of cash. BS: Cash down $100, PP&E up $100. Year 2Assume straight line depreciation over 5 years with 40% tax rate. IS: $20 of depreciation = $12 reduction in net income.CFS: Net income down $12 and depreciation up $20 = Net effect is cash up $8.BS: Cash (asset) up $8 and PP&E (asset) down $20. Retained earnings down $12 to balance. 89. A company makes $100 debt purchase of equipment on Dec. 31. How does this impact the three financial statements this year and next year? Year 1IS: No depreciation and no interest expense.CFS: No change to net income = no change to cash flow from operations. $100 increase in capex = $100 use of cash in cash flow from investing activities. Increase in cash flow from financing section = increase of debt of $100. Net effect on cash = 0.BS: No change to cash (asset), PP&E (asset) up $100 and debt (liability) up $100 to balance.Year 2Assume straight line depreciation over 5 years with 40% tax rate. Assume a 10% interest rate on debt and no debt amortization.IS: $20 depreciation + $10 of interest expense = $18 reduction in net income ($30 * (1-40%)).CFS: Net income down $18 and depreciation up $20 = Net effect of cash up $2.BS: Cash (asset) up $2, PP&E (asset) down $20, Retained Earnings down $18. 90. If cash collected is not recorded as revenue, what happens to it? Usually it goes into the Deferred Revenue balance on the Balance Sheet under Liabilities. Over time the Deferred Revenue balance turns into real revenue on the Income Statement 91. What is the difference between cash-based and accrual accounting? Cash-based recognizes revenue and expenses when cash is actually received or paid out. Accrual accounting recognizes revenue when collection is reasonably certain and recognizes expenses when they are incurred rather than when they are paid out in cash92. How do you decide when to capitalize rather than expense a purchase? Capitalize when the asset has a useful life of over 1 year (this is depreciated for tangible assets and amortized for intangible assets over a certain number of years) 93. A company has had a positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen? 1. Excessive capital expenditures (cash-flow neg) 2. Unaffordable high interest expense 3. Credit crunch for loan maturity. 4. Significant one-time charges (from litigation, etc.) that are high enough to bankrupt the company. 94. Income Statement 1. Sales Revenue2. COGSGross Profit3. Operating Expenses (SG&A)Operating Income (EBITDA)4. DepreciationEBIT5. Interest6. TaxesNet Income 95. Statement of Cash Flows 1. Net Income2. Operating ActivitiesDepreciationChanges to AR, Liabilities, Inventories, OtherTotal Cash Flow from Operating Activities3. Investing ActivitiesCapital Expenditures Investments/OtherTotal Cash Flow from Investing Activities4. Financing ActivitiesDividends BorrowingsSale of Stocks/OtherTotal Cash Flow from Financing ActivitiesChange in Cash and Cash Equivalents 96. Balance Sheet 1. AssetsCurrent Assets (Cash, AR, Inventory, etc)Long-term Assets (PP&E, Amortization, etc.)2. LiabilitiesCurrent Liabilities (AP, etc.)Long-term Liabilities (Debt, Minority Interest)3. Shareholder EquityAssets = Liabilities + Shareholder Equity 97. How do the 3 statements link together? Net income from Income Statement flows into Shareholders' Equity on the Balance Sheet and into the top line of the Cash Flow StatementChanges to Balance Sheet items appear as working capital changes on the Cash Flow StatementCash Flow investing and financing activities affect Balance Sheet items such as PP&E and Shareholders' Equity 98. If a company incurs $10 (pretax) of depreciation, how does this affect the three financial statements? 1. Income Statement: Depreciation is an expense, so EBIT declines by $10. Assuming a 40% tax rate, net income declines by $6.2. Cash Flow Statement: Net income decreases by $6 and depreciation increases by $10, meaning that cash flow from operations increased by $4.3. Balance Sheet: Since cumulative depreciation increased by $10, Net PP&E decreases by $10 (asset). Since cash flow increased by $4 on cf statement, cash increases by $4 (asset). The $6 reduction of net income causes retained earnings to decrease by $6. 99. If depreciation is a non-cash expense, why does it affect the cash balance? It is tax-deductable. Since taxes are a cash expense, depreciation affects cash by reducing the amount of taxes you pay.100. Walk me through a DCF analysis. 1. Project free cash flow for a period of time (5 years)Free Cash Flow = EBIT - Taxes + D&A - CapEx - Change in Working Capital (this measure is unlevered/debt-free bc does not include interest)2. Project Terminal Value: 2 methodsMethod 1: Gordon Growth (Perpetuity Growth) ~ choose a rate at which the company can grow forever, i.e. average long-term expected GDP growth or inflation.Method 2: Terminal Multiple method ~ multiply the last year's free cash flow by (1 + chosen growth rate)/(discount rate - growth rate) (used more often) ~ typically use EBITDA multiple (LTM basis from company comparable analysis)You might use GG over Terminal Multiple if you have no good Comparable Companies or if you have reason to believe that multiples will cahnge significantly in the industry several years down the road.3. Find present value of free cash flows and terminal value by using an a discount rate (aka WACC). 4. Sum up present value of projected cash flows and present value of the terminal value to get DCF value.Note: Bc we use unlevered cash flows and WACC as our discount rate, the DCF value = Enterprise Value, not Equity Value. 101. When would you not use a DCF in a valuation? You do not use a DCF if the company has unstable or unpredictable cash flows or when debt and working capital serve a fundamentally different role. 102. Why would you not use a DCF for a bank or other financial institution? Banks use debt differently than other companies and do not re-invest it in the business-they use it to create products instead. For financial institutions, it's more common to use a dividend discount model for valuation purposes. 103. What is working capital? How is it used? Working Capital = Current Assets - Current LiabilitiesPositive number => company can pay off its short-term liabilities with its short-term assets.Tells you whether or not the company is "sound" 104. How do you calculate the cost of equity? Via CAPMCost of Equity = Risk free rate + Beta*Equity Risk PremiumRFR: generally the yield on a 10 or 20 year U.S. Treasury BondBeta: levered and represents the riskiness of the company's equity relative to overall equity markets.Equity Risk Premium: The amount that stocks are expected to outperform the risk free rate over the long-term.Note: This formula does not tell the whole story. Depending on the bank and how precise you want to be, you could also add in a "size premium" and "industry premium" 105. How can we calculate Cost of Equity WITHOUT using CAPM? Cost of Equity = (Dividends per Share/Share Price) + Growth Rate of Dividends*Use where dividends are more important or when you lack proper information on Beta and the other variables that go into calculating Cost of Equity in CAPM. 106. Two companies are exactly the same, but one has debt and one does not-which one will have the higher WACC? The one without debt will have a higher WACC up to a certain point, because debt is "less expensive" than equity. Why?Interest on debt is tax-deductible.Debt is senior to equity.Interest rates on debt are usually lower than the Cost of Equity. 107. When using the CAPM for purposes of calculating WACC, why do you have to unlever and then relever Beta? We typically get the appropriate Beta from our comparable companies; however, before using an "industry" beta, we must first unlever the Beta of each of our comps. In general, stocks of companies that have debt are somewhat more risky than stocks of companies without debt. Why? Bc debt increases the risk of bankruptcy and funds are not being used to grow business (limits flexibility).We must first strip out the impact of debt from the comps' Betas (aka Unlever the beta). After unlevering, we can use the appropriate "industry" Beta (the mean of the comps). Then we can relever the beta for the appropriate capital structure of the company being valued, and then use the Beta in the CAPM formula. 108. Which is less expensive capital, debt or equity? Debt is less expensive (aka cost of debt is lower than the cost of equity). Why?1. Interest on debt is tax deductible (tax shield)2. Debt is senior to equity in a firm's capital structure. 109. Difference between enterprise value and equity value? Enterprise Value: represents the value of the operations of a company attributable to all providers of capital. Also helpful to think of Enterprise value as the takeover value. The main use for enterprise value is to create valuation ratios/metrics (e.g. EV/Sales, EV/EBITDA). Enterprise value = Market cap + Debt + Minority interest + Preferred shares - Total cash and cash equivalents. Enterprise value = Market cap + Total Debt - Cash and Cash EquivalentsEquity Value: a component of enterprise value and represents only the proportion of value attributable to shareholders. 110. Why do we look at both Enterprise Value and Equity Value? Bc Equity Value is the number the public-at-large sees, while Enterprise Value represents the true value of the company. 111. You are an options trader. A client comes to you and asks for quote for a call option on this building (where we are currently sitting). Even though you can price the call option using a conventional Black-Scholes model, or any other model, youd be very reluctant to sell it to the client. Why? 112. You are trading an asset which is capped at 100 (like say, a Eurodollar futures which is capped at 100 and cannot go above that value, as a value of 100 implies an interest rate of zero). What would be the value of a 100 strike put? 113. In a Black-Scholes formula, you see two terms, and . Which of these terms is a probability measure?114. You have studied a lot of probability theory in your Engineering school. What sets an option trader apart from a probability theorist (mathematician) as far as his belief in probability distribution is concerned? 115. You know what "equilibrium" means in physics or engineering. We all hear the term "equilibrium" every now and then in finance literature as well and in fact, Black-Scholes option pricing model is based on the notion of "equilibrium". That's why it's called an equilibrium model. Every experienced option trader (and in fact, every experienced derivatives professional) knows that "equilibrium" does not exist in real life. What do you mean by "equilibrium"? 116. A trader is trading a European style binary option (digital) and hedging it with a call spread. He finds that the call spread always has a higher price and even if he narrows the strike spacing (spread) the price remains a bit high (though it begins to come close to the binary). Why is this so, given the fact that for a reasonably small spread (strike spacing) a call spread accurately replicates a binary option? 117. What is the most intuitive way of looking at a barrier option (in terms of a vanilla option)? 118. You are trading Dollar-Yen (USD/JPY) options and the drift (domestic risk free rate minus the foreign risk free rate) of Dollar-Yen is 5% and the volatility is 10%. If you were now to price a Yen-Dollar (JPY/USD) option what would happen to your drift and volatility? 119. You are trading USD/HKD options. USD/HKD trades in a currency band between, say, 7.7300 and 7.7800. A hedge fund client comes to you to buy a put on HKD (call on USD) at a strike price of 8.1000 for a large notional amount. What would you do? Would you sell him the option? 120. You must have read about Ito's Lemma in your MBA and every mathematical finance text devotes many chapters on Ito's Lemma and stochastic calculus. The math is too complex for me. Yet it seems that without Ito's lemma there would be not Black-Scholes option pricing model and you and I might be working on a factory shop floor instead of a trading floor. Can you explain Ito's Lemma - or what it tries to do - in simple English? 121. What is the role of commodity futures market and why do we need them? One answer that is heard in the financial sector is `we need commodity futures markets so that we will have volumes, brokerage fees, and something to trade''. I think that is missing the point. We have to look at futures market in a bigger perspective -- what is the role for commodity futures in India's economy? In India agriculture has traditionally been a area with heavy government intervention. Government intervenes by trying to maintain buffer stocks, they try to fix prices, they have import-export restrictions and a host of other interventions. Many economists think that we could have major benefits from liberalisation of the agricultural sector. In this case, the question arises about who will maintain the buffer stock, how will we smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash when the crop comes out, how will farmers get signals that in the future there will be a great need for wheat or rice. In all these aspects the futures market has a very big role to play. If you think there will be a shortage of wheat tomorrow, the futures prices will go up today, and it will carry signals back to the farmer making sowing decisions today. In this fashion, a system of futures markets will improve cropping patterns. Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go down, then I can sell my wheat on the futures market. I can sell my wheat at a price which is fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires investments -- farmers spend money on fertilisers, high yielding varieties, etc. They are worried when making these investments that by the time the crop comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to fluctuations in prices. The third is the role about storage. Today we have the Food Corporation of India which is doing a huge job of storage, and it is a system which -- in my opinion -- does not work. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future. The converse is also true, thus if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities; arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets. In totality, commodity futures markets are a part and parcel of a program for agricultural liberalisation. Many agriculture economists understand the need of liberalisation in the sector. Futures markets are an instrument for achieving that liberalisation.122. But how equipped are the farmers to trade in the futures market, in terms of knowledge of the market and access to it? I should point out that there were flourishing futures and options markets in India prior to the ban on futures trading in the 1960s. That was a time when there was much less literacy and knowledge of modern finance in India as compared with today. Hence I would not be so worried about the abilities available in India to trade on these markets. In any case, the existence of a futures market does not involve forcing anyone to use it. It becomes an additional opportunity -- a new alternative -- that becomes available. To the extent that some people use it and become happier, that is good. The second point is that even for people do not use the futures market directly, there are major benefits. Suppose is there are some people who are doing the hard work of trading in the futures market by arbitraging, forecasting market trends or holding stocks, then they will influence the way the prices move. Even if I am a farmer who is a pure spot trader, I would benefit from the effect of the futures market.123. Does setting up separate futures markets for each commodity like the pepper market, castor oil market make sense? I can see a problem with setting up small exchanges. The trading volumes are small, the revenue stream is small, which leads to a lack of resources for exchanges to fund developmental work. In the olden days, markets used to be simple -- there was open outcry trading, there was no clearing corporation, there was no technology. Today to build a market like NSE costs Rs 50 to Rs 100 crore -- it is not a cheap affair. Where is the money going to come from? If a new futures market is set up for each commodity, then each of them will be unviable. There is some kind of deadlock here -- when the exchanges do a poor job, policy makers will be uncomfortable about having more futures markets. And, when major commodities are not tradable we will end up having small exchanges. I believe that the castor seeds futures market in Vashi is asking that all oilseeds should be traded on its floor. This is a move in the right direction. Lets look back at the biggest and most successful commodity exchanges in the world, they are like CME or CBOT who trade hundreds of commodities, which builds up the critical mass to attract membership also. Why would anyone go all the way to Cochin to trade in an exchange only for pepper? In the Invest India conference a suggestion was made that the regional stock exchanges, which have good trading infrastructure in place but tiny volumes, should be used for trading commodities. This is worth exploring. I believe that NSE has also offered that its facilities and its infrastructure can be used for trading in the futures market, that too is an excellent idea. It is a historical accident in India that some of the best development of modern market institutions has happened on the equity market. These are institutions like NSE which does trading, the National Securtites Clearing Corporation (NSCC) which does clearing and the depository. When we look at the commodity futures area, we should harness these skills and infrastructure to get a jump ahead in terms of market development at low cost. 124. What about the problems of warehousing if commodity trading takes place on the NSE? There is no modern commodity market in derivatives that does the warehousing. The way it works is that there are outside agencies that do warehousing who are depositories. When you submit one tonne of wheat to the warehouse, you get a receipt, which is submitted to the clearing corporation. So the clearing corporation only does risk management at a purely financial level. What we need is a development of a warehousing industry to cope with physical goods and checking of grades, while clearing corporations cope with financial risk.125. What about futures in bullion? Futures in gold will be useful, since millions of people in India use gold as a financial asset and are exposed to fluctuations in the price of gold. In addition, it's very easy to start a gold futures market. Gold is a natural commodity where we should be dealing with warehouse reciepts -- banks have already started giving gold depositories receipts, which clearing corporations would be comfortable relying upon. A market like NSE could start trading in Gold futures with just a few weeks of preparation. Obviously the consent of regulators will be required to getting such trading off the ground. Remarkably enough, it may not be necessary that we should have a gold futures market in India. There are several well functioning gold futures market outside India. Maybe we should just use them.126. But if people trade on foreign derivatives exchanges, won't that hurt the interests of India's exchanges? From the viewpoint of India's securities industry, it would be great to trade gold futures -- it would yield revenues and it would raise sophistication. If that can be achieved, it would be great, but it looks like it will take a while for the regulatory apparatus to permit gold futures in India. From the view point of the Indian economy -- and the economy is much more than the securities industry -- the important point is not the colour of the skin. It does not matter whether an Indian or a foreigner is running the exchange. The important point is to have access to these products. There are many situations where we would be better off by merely giving permissions to Indian to go abroad and trade in these markets. Why do we take it for granted that we have to wait for India's markets to develop. Witness the two year delay in getting an index futures market started -- these delays force India's households and companies to continue to live with risk. India's economy will benefit from having access to derivatives, whether they are come about through India's regulators and exchanges or not. If the Singapore government is friendly to derivatives markets in a way that India's government is not, India's citizens should go ahead and reduce their risk by using futures markets in Singapore. Hence we should not approach commodity derivatives looking only at the Indian securities industry. The interest of Indian consumers, households and producers is more important, as these are the people who are exposed to risk and price fluctuations. To the extent that foreign derivatives markets can reduce the risk for Indians, this is good. The RBI has recently released the R. V. Gupta committee report on these issues. It is an excellent piece of work, which paves the way for Indians to benefit from using foreign commodity futures markets. I think that this report is going to be a milestone in the history of India's financial sector.127. I heard it's not possible to short sell commodities. So how do you price commodity derivatives if you cannot short sell the underlying commodity? That is right all the commodities are traded via futures. There are funds such as USO on oil which are available to retail investors but even then the underlying is futures. Derivatives on futures is a tough space not just because of the requirement of technical indicators but also the fundamentals. There are several good books though including the one by Fabozzi (handbook of commodities). The situation would be much more complex, if you want to borrow from a less interest rate country such as Japan or Switzerland and invest into private real estate in a high GDP country such as China, India or even Brazil. Then hedge your FX exposure by having forwards /futures.128. Assist with entering trades into proprietary risk management system, Conduct research projects, provide general support to team members. 129. Look at the major commods (gold, silver, oil, gas etc) and see what the trends have been for the past year/6 months/1 month + current levels. Know what it means when someone says silver is in backwardation and why it may be the case. Know why the brent/WTI spread was so wide a couple weeks back and what has happened to it. Read up a little on what are the key driving forces behind each commodity (supply, demand issues). There was a great article on zero hedge about how pension funds were extremely underinvested in gold and silver and what affect this might have130. What is a common ratio used in project finance and how do you calculate it? Debt service coverage ratio = (Cash flow available for debt service + interest income) / Debt service CFADS = EBITDA Tax Capex + drawdowns Debt service = Principal repayments + Interest expense + lease commitments. 131. Why is the DSCR used and what range do you expect it to be in? Essentially an interest coverage ratio signifying how much cash is available to cover debt obligations, therefore it drives debt sizing in a project. Its usually 1.2x and upwards (Interviewer added: 1.2x-1.5x for regulated, up to 2.0x for unregulated).132. What is the credit rating for high yield?BB+/Ba1 and below. 133. Why use a project finance structure as opposed to corporate finance? Limited/non-recourse nature, asset as direct claim of cash flows, off balance sheet structure (Interviewer added: longer tenor, direct claim of assets).134. Why Derivatives?There are several risks inherent in financial transactions. Derivatives allow you to manage these risks more efficiently by unbundling the risks and allowing either hedging or taking only one (or more if desired) risk at a time (please see risk management for more details). For instance, if we buy a share of TISCO from our broker, we take following risks Price risk that TISCO may go up or down due to company specific reasons (unsystematic risk). Price risk that TISCO may go up or down due to reasons affecting the sentiments of the whole market (systematic risk). Liquidity risk, if our position is very large, that we may not be able to cover our position at the prevailing price (called impact cost). Counterparty (credit) risk on the broker in case he takes money from us but before giving delivery of shares goes bankrupt. Counterparty (credit) risk on the exchange - in case of default of the broker, we may get partial or full compensation from the exchange. Cash out-flow risk that we may not able to arrange the full settlement value at the time of delivery, resulting in default, auction and subsequent losses. Operating risks like errors, omissions, loss of important documents, frauds, forgeries, delays in settlement, loss of dividends & other corporate actions etc.Once we are long on TISCO we can hedge the systematic risk by going short on index futures. On the other hand, if we do not want to take unsystematic risk on any one share, but wish to take only systematic risk we can go long on index futures, without buying any individual share. The credit risk, cash outflow risk and operating risks are much easier to manage in this case. 135. What are Forward contracts?A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today. 136. What are Futures?Futures are exchange traded contracts to sell or buy financial instruments or physical commodities for Future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument/ commodity in a designated Future month at a price agreed upon by the buyer and seller. The contracts have certain standardized specifications. 137. What is the difference between Forward contracts and Futures contracts? Futures is a type of forward contract. Standardized Vs Customized Contract - Forward contract is customized while the future is standardized. To be more specific, the terms of a Forward Contracts are individually agreed between two counter-parties, while Futures being traded on exchanges have terms standardized by the exchange. Counter party risk - In case of Futures, after a trade is confirmed by two members of exchange, the exchange / clearing house itself becomes the counter-party (or guarantees) to every trade. The credit risk, which in case of forward contracts was on the counter-party, gets transferred to exchange / clearing house, reducing the risk to almost nil. Liquidity - Futures contracts are much more liquid and their price is much more transparent due to standardization and market reporting of volumes and price. Squaring off - A forward contract can be reversed only with the same counter-party with whom it was entered into. A Futures contract can be reversed with any member of the exchange.138. Can there be Futures on individual stocks?Such instruments exist in some countries (example Sydney Futures Exchange) but in general are not very popular. Price volatility in individual stocks is much higher than Index. This results in higher risk of clearing corporation and margin requirements. In addition, such instruments suffer from lack of depth and liquidity in trading. In most cases, Futures based on individual stocks often have a physical settlement, resulting in more complex regulatory requirements. It is much more difficult to manipulate an Index than individual stock, resulting in price manipulations.139. What is the difference between Commodity and Financial Futures? The basic difference between commodity and financial Futures is the nature of the underlying instrument. In a commodity Futures, the underlying is a commodity which may be Wheat, Cotton, Pepper, Turmeric, corn, oats, soybeans, orange juice, crude oil, natural gas, gold, silver, pork-bellies etc. In a financial instrument, the underlying can be Treasuries, Bonds, Stocks, Stock-Index, Foreign Exchange, Euro-dollar deposits etc. As is evident, a financial Future is fairly standard and there are no quality issues while a commodity instrument, quality of the underlying matters. 140. What do you mean by Closing out contracts?A long position in futures, can be closed out by selling futures while a short position in futures can be closed out by buying futures on the exchange. Once position is closed out, only the net difference needs to be settled in cash, without any delivery of underlying. Most contracts are not held to expiry but closed out before that. If held until expiry, some are settled for cash and others for physical delivery. 141. Is the settlement mechanism different for Cash and Physical Delivery? In case it is impossible, or impractical, to effect physical delivery, open positions (open long positions always being equal to open short positions) are closed out on the last day of trading at a price determined by the spot "cash" market price of the underlying asset. This price is called "Exchange Delivery Settlement Price" or EDSP. In case of physical settlement short side delivers to the specified location while long side takes delivery from the specified location of the specified quantity / quality of underlying asset. The long side pays the EDSP to clearing house/ corporation which is received by the short side. 142. Is there a theoretical way of pricing Index Future? The theoretical way of pricing any Future is to factor in the current price and holding costs or cost of carry. In general, the Futures Price = Spot Price + Cost of Carry Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may result in this period. The costs typically include interest in case of financial futures (also insurance and storage costs in case of commodity futures). The revenue may be dividends in case of index futures. Apart from the theoretical value, the actual value may vary depending on demand and supply of the underlying at present and expectations about the future. These factors play a much more important role in commodities, specially perishable commodities than in financial futures. In general, the Futures price is greater than the spot price. In special cases, when cost of carry is negative, the Futures price may be lower than Spot prices. 143. What is the concept of Basis?The difference between spot price and Futures price is known as basis. Although the spot price and Futures prices generally move in line with each other, the basis is not constant. Generally basis will decrease with time. And on expiry, the basis is zero and Futures price equals spot price. 144. What is Contango?Under normal market conditions Futures contracts are priced above the spot price. This is known as the Contango Market 145. What is Backwardation?It is possible for the Futures price to prevail below the spot price. Such a situation is known as backwardation. This may happen when the cost of carry is negative, or when the underlying asset is in short supply in the cash market but there is an expectation of increased supply in future example agricultural products.146. What is a derivative? A derivative is a financial instrument whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros. Futures, forwards, options and swaps are all examples of derivative contracts. 147. How are derivatives traded? There are two distinct types of derivatives; each is traded in its own way. Exchange-traded derivatives are traded through a central exchange with publicly visible prices. Over-the-counter (OTC) derivatives are traded and negotiated between two parties without going through an exchange or other intermediaries. The market for OTC derivatives is significantly larger than for exchange-traded derivatives and was largely unregulated until the Dodd-Frank Wall Street Reform and Consumer Protection Act prescribed new measures to regulate derivatives trading. The OTC market is composed of banks and other sophisticated market participants, like hedge funds, and because there is no central exchange, traders are exposed to more counterparty risk.148. What is the definition of a standardized swap? A swap is a type of derivative where two parties exchange financial instruments, such as interest rates or cash flows. There is still a lot of discussion on the definition of a standardized swap as it relates to central clearing. The CFTC and SEC continue to refine rulemaking around swap definitions and clearing requirements. 149. What are the advantages of electronic trading? By automating the execution process, electronic trading reduces commission prices and other human costs, which lowers overall cost-per-trade. Because electronic trading narrows spreads and increases liquidity, transparency and operational efficiency, it opens the market to more participants.150. What is the status of rulemaking in the U.S. and Europe? In the U.S., the bulk of these reform initiatives were embedded in the Dodd-Frank Act and implemented primarily by the Commodity Futures Trading Commission (CFTC), working in conjunction with the Securities Exchange Commission (SEC). In Europe, the regulatory landscape is a bit more fragmented as the majority of derivatives reforms are addressed in the Markets in Financial Instruments Directive (MiFID) and European Market Infrastructure Regulation (EMIR). Most major derivatives reform deadlines have been met in the U.S., but the process of rule implementation and enforcement is still unfolding in Europe. However, starting on February 12, 2014 all European-based entities trading derivatives including IRS, CDS and equity derivatives were required to begin reporting their transactions to a trade repository under EMIR.151. Does proposed legislation mandate electronic trading? The Dodd-Frank Act mandates that all routine derivatives be traded on Swap Execution Facilities (SEFs) or exchanges and be cleared through a clearinghouse.152. What is the definition of a swap execution facility (SEF)? The recently passed Dodd-Frank Act includes a requirement that any participant providing electronic markets for trading interest rate swaps will need to register as a Swap Execution Facility. A SEF is a facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce therefore allowing increased transparency and provides the tools for a complete trade audit.153. What is central clearing? Central clearing is the process in which financial transactions are cleared by a single (central) counterparty to reduce individual risk. Each party in the transaction enters into a contract with the central counterparty, so each party does not take on the risk of the other defaulting. In this way, the counterparty is essentially involved in two mutually opposing contracts.154. What are the advantages of central clearing? Central clearing of derivatives reduces counterparty risk and strengthens overall market integrity. It also helps with position segregation and portability in the event of a default, improves transparency for regulatory requirements and benefits the central management of trade lifecycle events, such as cash settlement with central counterparties and credit events in the CDS market.155. Which transactions must be centrally cleared? Currently, all exchange-traded and some OTC-traded derivatives contracts are centrally cleared. However, pending legislation central clearing will be required for most standardized OTC derivatives contracts. However, in July of 2012, the CFTC unanimously approved an exemption from the requirement that derivatives trades go through regulated clearinghouses. The exemption applies to commercial end users, such as industrial firms, utilities and airlines, which use swaps to counter risk in goods they purchase or manufacture and against fluctuations in interest rates.156. Which companies provide central clearing for the derivatives markets? LCH.Clearnet, the International Derivatives Clearing Group, CME, Eurex and IntercontinentalExchange (ICE) are among those who provide derivative clearing services in the U.S. and Europe. 157. Which government agencies in the U.S. and Europe are responsible for regulation? In the United States, the Securities and Exchange Commission (SEC),Commodity Futures Trading Commission (CFTC), and the Federal Reserve System (Fed), among others, are responsible for financial regulation. The Financial Conduct Authority (FSA) regulates the financial services industry in the UK. In Europe, each country has one national financial regulatory agency that regulates the market in that country, and ESMAcontributes to the supervision of financial services firms with a pan-European reach.158. Which portions of the market does each agency oversee? The SEC regulates the securities industry (stocks, bonds, and security-based derivatives) and enforces its laws. The CFTC regulates the trading of agricultural commodities and futures, but as of recently, since most futures are now based on securities, the distinction between the organizations has been blurring, especially with regards to derivatives regulation.159. In the UK and the rest of Europe, as each country only has one regulatory agency, that agency oversees the entire market.160. Whats the square root of 58? 161. How many smaller cubes are painted on 2 sides in a large cube made up of 9 smaller cubes on each side thats painted on the outside? Whats 57 x 83?STOCK PITCHExample stock pitch: I like Aero Dynamix, a leading manufacturer of commercial aircraft engines. It has about $500 million revenue and $100 million in EBITDA and trades at around $20.00 per share, at a P/E of 10x, vs. 11-12x on average for its competitors. I like them and think the price could rise to $25.00 per share, for a P/E of 12x, in the next 12 months. Right now, theyre undervalued by about 20% vs. competitors because prices and demand have declined in some of their key markets in Europe. But theyve just gotten started expanding in China, where theres far more growth, and 10% of their revenue will come from there by the end of the year. Also, oil prices have fallen 15% in the past several months but that hasnt been factored into their price yet. As those lower prices move through the system, air ticket prices are likely to decline, which should push up traffic and cause companies to invest in more aircraft, which will help the company. Finally, they operate at higher margins than the rest of the industry but havent received credit for that yet because the market over-reacted to bad news in one of their regions.The time frame for this investment is 12 months, with a target price of $25.00. I would set a stop loss at $18.00.The main downside risks are a general market decline, which could be hedged by shorting a broader index, and stagnation in emerging markets, which you could hedge by longing a defensive or blue-chip index or anything else not dependent on developing countries.You may get more questions after this initial pitch theyre likely to ask you more about the risks, how its valued vs. competitors, institutional ownership, and what specifically this company has that competitors do not.The best way to know all this is to get free equity research from a service like TD Ameritrade or other online brokerage accounts and read through reports and online sources that discuss the company. Equities: US DJIA, S&P 500, VIX; Europe Estoxx, FTSE 500, VStoxx; Asia Nikkei Credit: CDX NA IG, CDX NA HY, iTraxx Europe, iTraxx XO; SovX WE, SovX CEEMEA FX: EUR / USD, USD / JPY, GBP / USD, RMB / USD Commodities: Oil and gold Interest Rates: LIBOR, Fed Funds rate, 2-year and 10-year TreasuriesYour Interview Prep Checklist Your story and why you want to do S&T over anything else including related fields like asset management and equity research. 5-6 anecdotes from your resume that demonstrate the skill set needed in S&T, and an idea of how to re-use them for many fit questions. Knowledge of all the market indicators mentioned earlier, plus a sense of how theyve changed in the short-term, long-term, and how they might change going forward. 3 stock pitches, with at least 1 long idea and 1 short idea. 1-2 trade ideas FX, global macro, volatility, or anything else. 1 recent article or world event and your opinion on it. At least a few hours of practice with mental math and brainteaser questionsSquare Roots: So you should think in terms of square numbers instead. Lets say they ask you the square root of 58 Think, 7 ^2 = 49 And 8 ^ 2 = 64 58 is closer to 64 than 49, so the answer must be above 7.5 and below 8.0 So you can say approximately 7.7 its actually 7.6, but your guesstimate is close enough.Another common question: what is the square root of .9? You might instinctively say, 0.3! or 0.03! but you would be wrong. Once again, think in terms of known squares: 0.9 is close to 1, and 1 ^ 2 = 1 so the square root of 0.9 is approximately 1 (0.95 to be more exact, or you can just say slightly less than 1).Addition: The key here is to break up ugly numbers into round ones. Examples: 97 + 55 = (97 + 50) + 5 = 147 + 5 = 152 334 + 567 = (300 + 567) + 34 = 867 + 30 + 4 = 897 + 4 = 901Subtraction: Subtraction questions are similar but you need to decide when to round up if, for example, the numbers second digit is bigger than the second digit of the number youre subtracting from (e.g. 62 27). Examples: 62 27 = 62 30 + 3 = 32 + 3 = 35 934 478 = 934 500 + 22 = 434 + 22 = 456 934 437 = 934 440 + 3 = 494 + 3 = 497Multiplication: When youre multiplying a 2 or 3-digit number by a 1-digit number, its fairly straightforward because you just separate them into smaller groupings: 47 x 5 = (40 x 5) + (7 x 5) = 200 + 35 = 235 432 x 6 = (400 x 6) + (30 x 6) + (2 x 6) = 2400 + 180 + 12 = 2592It gets trickier when you have 22 multiplication or beyond (better hope they dont give you a 55 in an interview). The trick is to put the number with the larger second digit first and then group them into smaller units once again: 43 x 87 = 87 x 43 = (87 x 40) + (87 x 3) = (80 x 40) + (7 x 40) + (80 x 3) + (7 x 3) = 3200 + 280 + 240 + 21 = 3480 + 261 = 3680 + 61 = 3741Youll have to keep track of some larger numbers in your head, so I recommend saying the numbers out-loud when you go through the calculation.Squaring Numbers: This is easy if youre asked to square 6 or 7, but most interview questions involve 2-digit numbers.The trick is to use this formula: X^2 = (X + Y) * (X Y) + Y^2And then you set Y such that either (X + Y) or (X Y) end with 0. Examples: 89 ^ 2 = (89 + 1) * (89 1) + 1^2 = 90 * 88 + 1 = 90 * 8 + 90 * 80 + 1 = 720 + 7200 + 1 = 7921 56 ^ 2 = (56 + 4) * (56 4) + 4^2 = 60 * 52 + 16 = 60 * 50 + 60 * 2 + 16 = 3000 + 120 + 16 = 3136.

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