Interview - Potential to be a trader?

Well, since you are already selected for the interview they know, based on your background that you can do the job.There is no need to ask technical questions. They can judge by the way you approach answering their questions and they also want to make sure if you will fit into that group.

So, when they ask you behavioral questions they want to see how would you react and talk to clients and co workers and they also want to make sure that you are a person that they can depend on.

Good luck!!!

agree with nas2008.. dunno if this helps but I went for an interview for S&T analyst position and one of the questions was "if you have a pissed off client who just lost a tonne of money because of your bank and recommendations.. how would you handle him/her"... i know this question is more geared towards sales, but its a general idea of how the fit questions will work because from this they can tell if you have the EQ and brains to handle any type of client for them.

When you are interviewing for an S&T position, does the interviewer automatically ask you sales or trading, or do they ask you questions related to both positions?

hmmm depends on the nature of the program, I had two interviewers; one was an MD of Sales and the other was a credit trader. Both asked questions about everything related to sales and trading and they didn't ask me if I preferred sales or trading

"You have sold some options to the CFO of a small eastern European airline, as a hedge against the price of oil. The next day the price of oil drops dramatically. The CFO calls; he is furious and wants his money back. What do you do?"

What DO you do? I would assume this is the sales guys problem more than the trader since its his client.

Theoretically since they were doing a hedge for them shouldnt you explain that they should be indifferent what happens to the price of oil because they are locking in a rate opposed to speculating?

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

^^ From the way the question was phrased in the interview, it was made clear that I was the one who had to deal with this client. I didn't ask questions beyond that. And the second part of your post, yeah that's basically what I said.

If it's an option to hedge against rising oil prices (assuming it's just a call and wasn't a zero-cost), why would he be locked into a set price like a contract? If that's the case it makes sense that it works just like insurance against a bad fluctuation not in his favor, and the cost is treated like a premium against a potential loss.

At least that's how I read it. I don't pretend to be a trader, but could someone clarify why a non cost-free hedge would lock in a price? Or is it assumed it isn't a one-sided hedge?

"At least that's how I read it. I don't pretend to be a trader, but could someone clarify why a non cost-free hedge would lock in a price? Or is it assumed it isn't a one-sided hedge?"

There are collar structures that will lock you in at the floor price, which might still involve a premium being paid.

Assuming you hedged your entire inventory or however they do it. If the price of oil goes up the price that you must pay for it goes up. This increases your costs. However since you have bought the call option this increase in costs would be partially offset by the increase in the value of the option.

Assuming its a complete hedge, 3 months down the road when oil rises, sure he has paid more for oil but his call option increased in value. These offset each other.

If the price of oil fell he has paid less for oil reducing costs and the option will expire worthless. Again these offset.

When you hedge completely what you are doing is effectively locking in a rate. I am not an options trader but I do understand how companies will perform a hedge. Hedges are just what you said insurance.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

provided the final level is lower than the forward minus the premium he wins.

that's what I was referring to. do you always assume collared hedges? (I considered this zero-cost. I know it doesn't always add up that way so is technically wrong, but it was what I meant to reference.)

From the initial Q I assumed he hedged against a price increase and wanted his premium (being option cost) back.

Sorry you will have to excuse me for not making those assumptions. No information on the inventory was given, but yes as jimbo I see what your saying Jimbo. Youll have to excuse me as I am self taught in options. No classes or textbooks, just learning how they work over the past 4 years.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

Studio27, have Jimbo and trade4size misunderstood your question? I think you're still a bit confused, but I can't tell.

Here's my 2c worth, but I am not in S&T, and I do not study finance. So, this is self-taught. However, I do want to be a teacher, so I think I may understand your question and hopefully be able to explain it.

What probably happened is that the company bought a call option to hedge against a rise in oil prices. If the price of oil went up, the value of the option would increase and (partly) offsets the rise in oil (as trade4size said). If the price of oil goes down, the option will expire, and the company can buy oil at the new lower price. However, they have already paid a premium on buying the option in the first place. So, the price of oil must fall more than the value of the premium paid before the true price of oil for the company actually starts going down.

Now, I think your question wasn't really about how the option works but, "Why is the company pissed off? If the price of oil is going down and they bought a call option, shouldn't they be happy as they can still take advantage of the lower prices?" You shouldn't assume they were locked into a price (by some collared hedge) in order for them to be pissed off. You sold them a product to protect them against a rise in oil prices, and all the sudden that product has become worthless, they've paid a premium on top of that and they never "needed" it in the first place. This is the problem that the interviewer was probably looking for the candidate to tackle.

So, yes, you're probably right in that "he hedged against a price increase and wanted his premium (being option cost) back." That's exactly why he's pissed.

So I think you had it right, and you shouldn't worry about the collared hedges. Hope that makes sense.

"It is a fine thing to be out on the hills alone. A man can hardly be a beast or a fool alone on a great mountain." - Francis Kilvert (1840-1879)

"Ce serait bien plus beau si je pouvais le dire à quelqu'un." - Samivel

"So, yes, you're probably right in that "he hedged against a price increase and wanted his premium (being option cost) back." That's exactly why he's pissed."

well he's a jackazz then. it's like wanting your car insurance back b/c you didnt get into an accident.

Jimbo, isn't that the point of the interview question? I don't think it's meant to be a technically difficult question, but the candidate is supposed to explain how they would treat an irrational and angry client. I think it is very similar to someone wanting their insurance back because they didn't get into an accident. It's stupid, but isn't that the point the candidate is supposed to explain in the interview?

"It is a fine thing to be out on the hills alone. A man can hardly be a beast or a fool alone on a great mountain." - Francis Kilvert (1840-1879)

"Ce serait bien plus beau si je pouvais le dire à quelqu'un." - Samivel

That's what I was referring to. It just seems illogical that he would be pissed and want money back from a one-way hedge. That's what I was meant with my (and Jimbo's) insurance analogy. He still gets this lower priced oil and he hedged against the event that the price rose to whatever level. It's a price paid for "peace of mind," or whatever levels of risk aversion the firm has. Worst case scenario the company sells the call and is out a few bp's in the process from the new value.

If you assume the hedge was collared, then he's more or less locked in to a specific price -- where the situation could be potentially worse if the price of oil dropped. If that was the case, then it seems reasonable to get pissed. From the context of the question, however, I didn't see the scenario as a contract hedge or collared option.

@ fandango - this may be an easier way to explain (since you want to be a teacher, I hope this would help. Again, I'm not in S&T.)

as far as I can tell, it doesn't matter whether it's a Euro or American option -- with the exception of if it's a Euro then the whole thing is probably moot bc a Euro option expiring the next day is ... odd. If this was the case, it was probably damn cheap so the CFO needs to stop whining.

A company buys a call (right to buy at a specific price) to hedge against rising oil prices for X dollars - what I'll call the premium. Price goes above the call's strike (value that you execute the call), and you exercise the call and buy oil at a price lower than the current market.

Now, if the price goes down, the option won't technically expire unless the expiry date has passed or it's a knock-out. Assuming plain vanilla, you can still sell your call at a likely reduced value. [Because oil is a lower price now, you'll need even higher volatility to reach the strike of your option. As it's less likely, it has a lower value, in much the same fashion as insurance.] Yes they are out the premium. If they retain the option they still have the hedge in case the price increases past the strike. If they sell the option, then they will recoup some of the costs.

I don't think the price of the oil relative to the premium should be necessarily considered. I would view the premium as a sunk cost for insuring against a significant increase and that's that. It's not like you wasted money buying car insurance if you don't wreck your car. (e.g. rising oil price is a car crash, and falling oil price is a radio prize for a free car wash. Either way, you're insured if you have a crash, and that's what you pay for.)

And going back to the CFO, the option was insurance. If he was comfortable with his odds, then so be it and ride the price. If not, you pay for it. Obviously it would need to be phrased a bit more tactfully, but still. That's the beauty of an option -- you don't have to exercise. Basically I didn't understand why the CFO was huffy over a simple insurance premium. Could always tell him to take whatever hit and sell the call, but then it would be really bad if the price exploded. If it can drop dramatically, i don't see any reason why it couldn't go back up dramatically.

Sorry that's long. Feel free to correct if anything's inaccurate.

Studio27, that looks like a good explanation to me. I apologise for somehow misunderstanding your level of knowledge about options. I was trying to explain the situation without using much of the "lingo". Your version is certainly more detailed and correct than mine. For some reason I thought you were a complete beginner to options. Sorry!

Still, I think the question, "You have sold some options to the CFO of a small eastern European airline, as a hedge against the price of oil. The next day the price of oil drops dramatically. The CFO calls; he is furious and wants his money back. What do you do?" is partly a simple question about options to make sure the candidate understands them. If you can say all the things Studio27 said above, you obviously understand them to a degree. And then if you can give a reasonable answer as to how to explain to the CFO that he shouldn't be angry (it was "insurance"), then you should be alright. I don't think the interview question should make you assume things like collared hedges. Do you guys agree?

"It is a fine thing to be out on the hills alone. A man can hardly be a beast or a fool alone on a great mountain." - Francis Kilvert (1840-1879)

"Ce serait bien plus beau si je pouvais le dire à quelqu'un." - Samivel

"If you assume the hedge was collared, then he's more or less locked in to a specific price -- where the situation could be potentially worse if the price of oil dropped. If that was the case, then it seems reasonable to get pissed."

Well he didn't pay anything for the collar, so why would he be pissed? it's just like locking into a forward (which is just a type of collar anyway). That's what your price will be. If you were comfortable with it then, you'll be comfortable now.

"bc a Euro option expiring the next day is ... odd. "

actually there are a good number of next day straddles in the rate and fx markets.

If I talked him into a "forward" and the price drops dramatically, he's at a competitive disadvantage from my suggestions. It's not really insurance any more in the same sense. He's not necessarily out just a fixed amount of money (or this amount could be relatively significantly higher), but he's paying cost plus for the oil (in a sense. assuming he wrote a put and if price goes below the strike), which depending on how much the price dropped, could be an even worse situation.

I agree that if he was fine with it then he should be comfortable now, but people in general are irrational. It's not beyond plausibility that he would say, "you talked me into this, and it was wrong. do something to fix it."

Didn't know about one-day euros. That's interesting, thanks for the heads up. Do people do it as an end-day thing when they know they're going to change currencies and want to ensure a stable price?