Generic Mining Finance and Commodities Trading Interview Questions

Prep 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 company
5. 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 regulations
9. Algorithm to find all power sets of a set
10. 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 resume
14. 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 company
22. 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? 10000
25. 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 experience
30. 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 outcome
32. Describe a situation where you had to implement a new idea, and how did you go
about it
33. An example of a bad team that I had to work with
34. 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 deal
37. How do u cope with stress
38. What sector has performed the best in the past 20 years? How has the mining sector
changed in the last 10-20-50 years?

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56.

Valuation of illiquid pool of investments

Tell us of something most people don't know about our company.
Describe CDS? What factors change the spread?
Go through NORMAL DISTRIBUTION
BLACK SCHOLES
List the steps that you would take to make an important decision on the job.
Describe how you would handle the situation if you met resistance when introducing
a new idea or policy to a team or work group.
How would you explain the internet to your grandmother?
How would you confront a loose but loyal subordinate?
How would you value this building?
How to model PIK
OTC Contracts?
Hedge Books?
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?
Tell us about a time when you had to make a change? How did you go about it and
what was the result?
Have you ever had to deal with conflicting deadlines? How did you decide what to
prioritize?
Comparable company analysis? Industry average? comparison by size, market cap?
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 analysis
Uses 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 multiples
Go 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 valuation
After 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 strategy

58. 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-ofperiod 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 pipeline
67. 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 no impact (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 $450m

72. 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 pays less in 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 pays more in 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 annual demand 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' Equity
85. If a company incurs $10 (pretax) of depreciation, how does this affect the three
financial statements?

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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.
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.
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
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 1
Assume 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 2
Assume 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.
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 1
IS: 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 2
Assume 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.
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
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
cash
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)
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 Revenue
2. COGS
Gross Profit
3. Operating Expenses (SG&A)
Operating Income (EBITDA)
4. Depreciation
EBIT
5. Interest
6. Taxes
Net Income
95. Statement of Cash Flows
1. Net Income
2. Operating Activities
Depreciation
Changes to AR, Liabilities, Inventories, Other
Total Cash Flow from Operating Activities
3. Investing Activities
Capital Expenditures
Investments/Other
Total Cash Flow from Investing Activities
4. Financing Activities
Dividends
Borrowings
Sale of Stocks/Other
Total Cash Flow from Financing Activities
Change in Cash and Cash Equivalents
96. Balance Sheet
1. Assets
Current Assets (Cash, AR, Inventory, etc)
Long-term Assets (PP&E, Amortization, etc.)
2. Liabilities
Current Liabilities (AP, etc.)
Long-term Liabilities (Debt, Minority Interest)
3. Shareholder Equity
Assets = 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 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' 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 methods

Method 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 Liabilities
Positive 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 CAPM
Cost of Equity = Risk free rate + Beta*Equity Risk Premium
RFR: generally the yield on a 10 or 20 year U.S. Treasury Bond
Beta: 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 notwhich 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 Equivalents
Equity 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

10

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.

11

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 have
130.
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

12

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

13

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.

14

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 exchangetraded 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 ESMA contributes 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.

15

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 PITCH
Example 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 Treasuries

Your 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 questions

16

Square 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 = 901

Subtraction: 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 = 497

Multiplication: 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 = 2592

It 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 = 3741

Youll 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^2

And 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.

17