ScotiaBank Global Capital Markets Interview Prep

What are Treasury Futures?

They allow market participants to take views on future rate movements in an off-balance sheet capacity. These include:

TU (2 year)

FV (5 year)

TY (10 year)

TN (10 year, ultra long)

US (30 year)

AUL (30 year, ultra long)

Give an example of a markets-based story you've read recently and why you found it interesting?

Asset manager Golub Capital has combined four CLOs into biggest reset on record. The combination broke the $2 billion record set by Antares in 2021. CLOs are securities that bring in capital through bonds sold to credit investors who want exposure to leveraged loans or private credit loans. CLO resets allow investors to refinance and extend the life of the securities. As the cost of funding has declined in 2024, CLOs have become more popular.

What are some important economic indicators to watch out for?

GDP

core CPI

P/E ratio

Moves in Fed Funds

S&P level (or whichever equity index is most relevant)

Changes in 5Y5Y5 swap rates

If we have a bond trading at 90 with a 10% coupon and it matures next year, then what is the yield to maturity?

YTM = (coupons + (face value - current price)) / current price

(10+(100-90))/90 = 22.22%

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.

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.

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

Primary markets are where stocks and bonds are issued through investment banks (IPOs and Seasoned Equity Offerings)

Secondary markets are where those stocks and bonds are traded by institutions and individuals.

What are credit spreads?

Difference in yield between a U.S. Treasury security and another debt security of the same maturity but different credit quality.

How is a Collateralized Loan Obligation (CLO) structured?

A collateralized loan obligation is broken down into several tranches with decreasing levels of priority on the underlying cash flows of the levered loans that make up the CLO. They're structured in the same order as credit ratings (E.g. Class A Notes are structured to ensure they get an AAA rating from credit agencies.

What do we mean by curve trades in rates trading?

They are a way to generate returns and hedge in the interest rate markets. They can be executed in a variety of markets, including U.S. Treasuries, futures, swaps, and euro-dollars.

How does an equity derivatives desk make money?

They deal with large and sophisticated institutional clients who might be using equity derivatives for hedging or speculative purposes. The main goal is to do a trade in which you can entirely hedge out your exposure (making no money from the trade working or not for the client) while still making money at time zero

Can you give me a simple example (with numbers) of how delta hedging works?

We know that delta of an option simply measures the change in the value of the option for a change in the underlying. For example, if we have a delta of 0.5 on a trade and a trader on the sell-side sells calls on a certain number of shares, then we will be going and buying half that number of shares to hedge out the risk. This is because if the underlying moves up in value given that we sold calls, we would be losing money. However, the loss in the value of the call options we wrote would be negated by the long equity position we put on as a hedge.

What is a long put position in relation to delta, gamma, theta, vega, and rho?

A long put would have:

NEGATIVE Delta

POSITIVE Gamma

NEGATIVE Theta

POSITIVE Vega

NEGATIVE Rho

When would you expect the time value of an option to be highest?

When you're right around the strike price since you are on the precipice of either being ITM or OTM

What assumptions do the Black-Scholes model make that are wrong?

1. There is a pronounced skew in actual returns on shares, meaning there is a bigger chance of significant losses than is built into the shape of the bell curve

2. The model assumes that returns follow a random walk, which is not what is actually observed.

3. The model assumes it is possible to delta hedge without transactions and without liquidity constraints.

4. The model assumes you the know the level of volatility and that it stays constant over the life of the option.

What are the two kinds of municipal bonds?

General Obligation bonds (backed by the general taxing authority of the issuer) and Revenue bonds (tied to the actual revenue generation of the project the bonds are funded)

Who buys municipal bonds and why?

Large private wealth managers, mutual funds, insurance companies. They buy at issuance and hold throughout the duration of the bond due to the tax exempt nature of municipal bonds.

What are mortgage backed securities?

A form of ownership of a wide, diverse set of mortgages and the underlying cash flows that come from folks making their monthly mortgage payments.

What are some reasons why a corporate client may want to do an fx trade?

1. They're able to issue debt cheaply in a certain country with a certain currency but will want to swap it to a different currency.

2. They want to lock in a certain conversion rate in the forward market.

3. They're anticipating the need to spend capital (building a new plant in a foreign country) and want to lock in an exchange rate to ensure they can more accurately predict the total cost of the project.

In Sales and Trading, who are our clients?

Hedge funds, large asset managers, pension funds, corporations, institutional clients

What are the differences between mortgage-backed security and treasury bonds?

They differ in their payment schedule. Bonds have a pre-determined maturity date and coupon rate. Mortgage holders are able to decide how they finance.

They also differ regarding interest rate. A bond's yield fluctuates with the interest but the coupon remains constant. MBS can either be positively or negatively impacted by interest rate changes

What is the probability of flipping 3 heads and 1 tail using 4 coins?

Number of possible combinations (nCr) = n!/r!(n-r)!

4!/1!(4-1)! = 4

All possible outcome = 2^4 = 16

4/16 = 25%

Are convertible bonds more similar to debt or equity?

Somewhere between the two.

A convertible bond is considered a debt instrument but can be converted to a predetermined number of shares at a specific strike price, making it have features like an equity.

What happens to bond prices when yield increases?

There is an inverse relationship between bond prices and yield prices. As yield increases, prices decrease.

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

One might have an embedded call option. As the investor, I am giving up potential upside in the callable bond if interest rates plummet, So I am less willing to pay up for the callable bond.

Alternatively, I might be willing to pay more for a putable bond since the issuer sold me a bond and threw in an option that I can use to return the bonds to the issuer if interest rates soar.

I have two bullet bonds of similar maturity and coupon. One trades above the yield curve, the other trades under the yield curve. Which is the better buy?

The better buy is the bond trading over the yield curve.

Is there an exchange of principal in a foreign currency swap?

Yes because the swap involves two different currencies. An exchange of principal at the outset and maturity of the swap is required.

Also, since there is no common currency upon which interest payments can be netted against, interest payments are paid in full in the two currencies involves in the swap.

Ignoring credit risk, what causes swap spreads to narrow or widen?

Interest rate expectations.

When interest rates are expected to rise, more borrowers want to swap into fixed and receive floating, so swap spreads widen

When interest rates are expected to decline, more borrowers want to swap into floating and receive fixed, so swap spreads narrow.

What is put-call parity?

Relates the price of European puts and calls

P = C - S + PV(K)

C: price of the call with the strike price K

S: price of the underlying security

P: price of the put with strike price K

What are the limits of duration?

They are useful for measuring price volatility. However:

1. Estimates are only valid for small changes in yield

2. Duration assumes a parallel yield-curve shift, even though yield curves very rarely shift in a uniform fashion.

3. Does not account for yield volatility

4. Cannot value bonds with embedded options

Assume a Treasury bond and a junk bond are issued at the same time and with the same maturity. Which bond has a greater duration?

The Treasury bond

Duration is higher because the Treasury bond carries a lower coupon rate, which raises duration relative to the higher coupon junk bond.

Why do yield curves invert?

Long-term interest rates are lower than short-term interest rates. Yield curves tend to invert following periods of tight money and tight credit and when the curve inverts, the market is expecting that the short-term interest rates will decline.

Assume an inverted yield curve. How do I make money in bonds if I expect the yield curve to revert?

If the yield curve reverts, short-term rates must rise more than long-term rates. You want to put on a curve-steepening trade where you buy long-term maturities and are short short-term maturities.

What is the difference between a stock exchange and a futures exchange?

How a price is determined.

A share of a stock represents fractional ownership interest in a company

A futures contract represents the obligation to accept or deliver a quantity of a commodity on a pre-specified future date.

What is the duration of a zero coupon bond?

Zero coupon bonds are issued at a discount and investors receive a single par payment at maturity.

This means the duration is equal to its maturity.

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.

What is the expected value of a roll of a dice

3.5

(1+2+3+4+5+6)/6

Make me a price on the 8 serial numbers on a $1 bill

55555555

What is the probability of flipping 3 heads and 1 tail on 1 coin?

0.0625

0.5^4

If interest rates in the U.S. increase, how does this affect the USD CAD exchange rate?

The US dollar would strengthen relative to the Canadian dollar.

What's market making?

Constantly looking to minimize risk, serve clients, and position their book in the best possible way given the market conditions (while still serving the needs of the clients)

What are the 5 greeks? (The partial derivatives of the option pricing model)

Calculations that help measure different factors that might affect the price of an option contract.

Delta: Help gauge the likelihood an option will expire ITM (strike price is bellow (for calls) or above (for puts) the underlying security's market price

Gamma: Help estimate how much the Delta might change if the stock price changes

Theta: Help measure how much value an option might lose each day as it approaches expiration

Vega: Help understand how sensitive an option might be to large price swings in the underlying stock

Rho: Help simulate the effect of interest rate on an option

What are the 4 types of trades?

Flow Trading: Banks act as a principal, making markets directly and not through an exchange

Agency Trading: For heavily traded, liquid securities.

Electronic Trading: Removing human touch points from the trading process.

Prop Trading: Proprietary trading aka trading you're doing for the bank as opposed to the client

What are the major divisions/desks within sales and trading

FICC (Fixed Income, Currencies, and Commodities) and Equities

Fixed Income:

- Rates: Government Bonds and Interest Rate Derivatives

- Credit: Corporate Bonds (High Grade, High Yield, Loans), Credit Derivatives

- Securitized Products: Mortgage Backed Securities, Asset Backed Securities

- Municipals, Tax-exempt bonds (State, Municipality, Non-Profit)

Equities:

- Cash equities: Trading ordinary shares of stock

- Equity derivatives: Trading derivatives of equities (stock options) and equity indices

What are the roles in Sales and Trading?

Sales: In charge of the relationship with clients on behalf of the investment bank

Trading: They make a market and execute trades on behalf of investors, which a focus on specific products.

Structuring: Traders for more complex products.

Research: They provide salespeople, traders, and investors directly with insights and potential investment and trade ideas

Quant/Strat: Handle electronic or algorithmic trading platforms.

Pitch a long pitch stock

Apple

1. Loyal Customer Base

2. Solid Financials

3. Robust Cash Flow

3. Expansion in Emerging Markets.

Pitch a short pitch stock

Netflix

1. Intensifying Competition

2. Rising Content Costs

3. Subscriber Stagnation

4. Vulnerability to Industry Disruption (Generative AI)

Pitch a macro pitch stock

Renewable energy sector

1. Global Shift towards Clean Energy

2. Technological Advancements

3. Rising Consumer Demand for Clean energy

What is the Black-Scholes Model

The Black-Scholes model is the industry standard for pricing options. The formula is pretty complicated, with 6 inputs that affect the price. They are the current price of the asset, the exercise price of the option, the time until expiration, the current risk free rate, the asset's variance, and the dividend yield.

What is a bond?

A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.

what is a call option?

option to buy in the future, up to an exp date at a price set today

what is a put option?

the right to sell an asset at a specified exercise price on or before a specified expiration date

What is the yield curve?

a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations