common mba finance interview questions - treasury and capital markets interview questions

Capital market jobs are highly aspirational and equally competitive. Therefore, to be able to crack the interview, you must be prepared for a variety of technical, treasury and capital markets interview questions.

Mostly, capital markets interview questions revolve around the various commodities traded in the markets. A lot of treasury and capital markets interview questions would also test your understanding of trading strategies.

Given below are some technical MBA finance interview questions that are typically asked in capital market interviews.

common mba finance interview questions - treasury and capital markets interview questions

Q. 1. What are the various treasury products that a client can use for hedging?

The various Treasury Products that a client can use for hedging are as follows:

  1. Forward Contract– A forward transaction is a contractual commitment to buy or sell a specified amount of foreign exchange for a specified price at a specified future date.
  2. Swaps-A Swap is a contract, where two parties exchange a series of cash flows in the same currency(termed an Interest Rate Swap) or different currencies(termed a Currency Swap), based on certain agreed parameters.
  3. Options: Options are Insurance contracts. They give the holder, the right, but not the obligation, to buy or sell foreign exchange at a specified price called the strike price and at a specified future date called the exercise date. The right to buy is called a ‘call’ option, and the right to sell is called a ‘put’ option.

Q. 2. What is a derivative? What are Options and how is pricing done?

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).

Options on stocks and exchange-traded funds are common derivative contracts. Options give the buyer the right, as opposed to the obligation, to buy or sell 100 shares of a stock at a strike price for a predetermined amount of time.

The best-known pricing model for options is the Black Scholes method. This method considers the underlying stock price, option strike price, time until the option expires, underlying stock volatility and risk-free interest rate to provide a value for the option.

Q. 3. If interest rates go up will you invest in debt or an FMP?

If the interest rates are on a rising trend, one should invest in debt and not FMP. In case of Fixed Maturity Plans (FMP), investments can be made only at the time of new fund offer and the rate of interest remains fixed. In case of debt, there is a scope to invest in floating bonds which will offer higher return at the time of rising interest rates.

Q. 4. Give me three factors that affect the debt markets and three factors that affect the forex market?

Debt Markets:

Debt markets are where investors buy and sell debt securities mostly in the form of bonds.

  1. Interest rates: Changes in interest rates affect bond prices by influencing the discount rate.
  2. Inflation: Inflation produces higher interest rates, which in turn requires a higher discount rate, thereby decreasing a bond’s price.
  3. Credit Ratings: Bonds are rated by independent credit rating agencies. Bonds with high risk and low credit ratings are considered speculative and come with higher yields and lower prices.

Forex Markets:

Forex markets are where participants are able to buy, sell, and exchange on foreign currencies.

  1. Country’s Current Account/Balance of Payments: If a country is spending more of its currency on importing products than it is earning through the sale of exports, it causes depreciation. This fluctuates the exchange rate of its domestic currency.
  2. Speculation: If a country’s currency value is expected to rise, its demand increases thereby increasing its value. This rise in value causes an increase in the exchange rate.
  3. Terms of Trade: The terms of trade are the ratio of export prices to import prices. Higher the ratio, higher the demand of the currency and hence higher is its exchange rate.
factors that affect debt and forex markets

*MBA finance interview questions like these are often asked in interviews of other roles too, to test the candidate’s general awareness of markets.

Q. 5. Explain put call parity?

Put-call parity is a principle that defines the relationship between the price of European Put Options and European Call Options of the same class, that is, with the same underlying asset, strike price, and expiration date.

Put-call parity states that simultaneously holding a short European put and long European call of the same class will deliver the same return as holding one forward contract on the same underlying asset, with the same expiration, and a forward price equal to the option’s strike price.

The equation expressing put-call parity is:

C + PV(x) = P + S

C = price of the European call option
PV(x) = the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rate
P = price of the European Put
S = Spot price or the current market value of the underlying asset

Q. 6. What is convexity of a bond? Explain Duration? How can we apply it for trading?

Convexity is a measure of the curvature, or the degree of the curve, in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes.

Bond duration measures the change in a bond’s price when interest rates fluctuate. If the duration of a bond is high, it means the bond’s price will move to a greater degree in the opposite direction of interest rates. Conversely, when this figure is low, it will show less movement.

We can use convexity as a risk-management tool, to measure and manage the portfolio’s exposure to interest rate risk. The risk to a fixed-income portfolio means that as interest rates rise, the existing fixed-rate instruments are not as attractive. As convexity decreases, the exposure to market interest rates decreases and the bond portfolio can be considered hedged.

Typically, the higher the coupon rate or yield, the lower the convexity—or market risk—of a bond. This lessening of risk is because market rates would have to increase greatly to surpass the coupon on the bond, meaning there is less risk to the investor.

Q. 7. If Nifty does not move much, what trading strategy would you suggest?

If Nifty does not move much and the market is stable, one should use Straddle strategy.

A straddle is the purchase of both a Call and a Put, at the same strike price. The trader has the right to buy and the right to sell as well in case the market moves in either direction.

The trader can make a profit by either exercising a call option or a put option in a stable market environment.

*One of the common capital markets interview questions that test your understanding of trading.

Q. 8. What is a Callable bond?

A callable bond is a bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early. A business may choose to call their bond if market interest rates move in a favorable direction and will allow them to borrow at a more beneficial rate.

Callable bonds also benefit investors as they typically offer an attractive interest rate or coupon rate due to their callable nature. Callable bonds are also commonly referred to as redeemable bonds.

Q. 9. How can you arbitrage and make money in derivatives?

Arbitrage is making money on price differentials in different markets. For example, a future is nothing but the future value of the spot price. This future value is obtained by factoring the interest rate.

But if there are differences in the money market and the interest rates change then the future price should correct itself to factor the change in interest. But if there is no factoring of this change then it presents an opportunity to make money- an arbitrage opportunity.

Q. 10. What are the advantages and disadvantages of an IPO?

For the company, the advantages of going public include:

  1. Fundraising – IPOs are great fundraising opportunities for companies. With a number of new investors and capital, the company can focus on expanding and growing in different ways.
  2. Publicity and Credibility – Going public helps increase a company’s exposure to potential customers. Public companies are also considered more credible since all their information is publically available and verified. Customers tend to trust public companies more because of this and it also helps enhance the company’s reputation.
  3. Reduced cost of capital – Loans with a high-interest rate is the primary source of capital for private companies. Public companies can always raise capital through offerings on the stock exchange which usually come with lesser costs and interest.

The disadvantages of public companies are:

  1. Additional Regulatory Requirements and Disclosures – Public companies have to verify and file their financial statements with SEBI every year. This comes with additional costs like recruiting a financial team, hiring auditing firms, extensive labor hours, etc.
  2. Market Pressure and loss of control – Market pressure can force the company leadership to focus on short-term investor goals rather than executing the company’s long –term vision. The company leadership can also be forced out if they don’t act in the best interest of the public and shareholders.

These were some technical MBA finance interview questions that are typically asked by treasury and capital market recruiters.

To be able to crack these technical interviews, it is crucial to have an in-depth understanding of trading products and strategies. In the FLIP Treasury and Capital Markets course, you learn about all these products and strategies. This helps you acquire the right knowledge to ace such technical interviews with practical insights.

Common MBA finance interview questions | Vol. II – Treasury and Capital Markets

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