Hi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. I later googled and found that Futures have convexity but I don't think that's a reason why they are included. Rather it's disadvantage that futures have convexity2. What is the reason for migrating to OIS discounting?I answered that trades are collateralized and hence we should use risk-free rate which is the OIS rate. But the interviewer said there is another specific reason why we have moved to OIS discounting.3. Volatility sufrace and volatility smile?I have not worked on Options and It's been 3 years since I completed my MBA. So he forgave me for the complete lack of knowledge on this frontOther questions that I could answer were4. When do you use Monte Carlo and when do you use parametric approaches to VaR?5. What?s the lag for RPI bonds? 6. You have a fixed vs. float IRS. In the first case you discount with LIBOR curve and in the second case you discount with the OIS curve. What is the difference? 7. What?s convexity?8. How to value LPI inflation swaps (Limited price index)

I might be completely off but here is my take:1. More convenient quoting for ED futures?2. Because the collateral is discounted with OIS rate/curve, i.e. collateral value grows with OIS rate?4. MC for longer horizons. Parametric VaR for short time horizons, and much less computationally intensive framework. You need to be really sure about your assumptions on the return distributions in both cases though.6. http://www.risk.net/risk-magazine/featu ... ng-change7. Depends on which convexity you are referring to... It refers to the difference between futures and forward prices (i.e. risk neutral vs forward measures), and roughly speaking it is related to the covariance between the underlying and the interest rates.QuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. I later googled and found that Futures have convexity but I don't think that's a reason why they are included. Rather it's disadvantage that futures have convexity2. What is the reason for migrating to OIS discounting?I answered that trades are collateralized and hence we should use risk-free rate which is the OIS rate. But the interviewer said there is another specific reason why we have moved to OIS discounting.3. Volatility sufrace and volatility smile?I have not worked on Options and It's been 3 years since I completed my MBA. So he forgave me for the complete lack of knowledge on this frontOther questions that I could answer were4. When do you use Monte Carlo and when do you use parametric approaches to VaR?5. What?s the lag for RPI bonds? 6. You have a fixed vs. float IRS. In the first case you discount with LIBOR curve and in the second case you discount with the OIS curve. What is the difference? 7. What?s convexity?8. How to value LPI inflation swaps (Limited price index)

QuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. that's exactly the main reason (except the blah blah part).

QuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. that's exactly the main reason (except the blah blah part).FRAs have counterparty risk (because they are OTC) where as futures don't (because they are traded through an exchange), so it is easier to build counterparty risk free curves with futures.

QuoteOriginally posted by: ChicagoGuyQuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. that's exactly the main reason (except the blah blah part).FRAs have counterparty risk (because they are OTC) where as futures don't (because they are traded through an exchange), so it is easier to build counterparty risk free curves with futures.right. Didn't he say "exchange traded" though?

QuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: ChicagoGuyQuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. that's exactly the main reason (except the blah blah part).FRAs have counterparty risk (because they are OTC) where as futures don't (because they are traded through an exchange), so it is easier to build counterparty risk free curves with futures.right. Didn't he say "exchange traded" though?Futures are by definition exchange traded and forwards are OTC. So saying that futures are exchange traded is not insightful. The term "exchange traded" and "counterparty free" are not equivalent, though one implies the other (if you consider the exchange to have zero probability of defaulting, which is not the case). Both forwards and futures can be liquid and illiquid.

I think futures being exchange-traded and forwards being OTC is not the only reason that impacts the curve construction. Another important difference is futures are always cleared, but not all FRAs are cleared. It would be interesting to see the usage or impact of CCP cleared FRAs (not sure there is a huge market for these out there) for forward curve construction.QuoteOriginally posted by: ChicagoGuyQuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: ChicagoGuyQuoteOriginally posted by: ThinkDifferentQuoteOriginally posted by: kirankondapalliHi,I had my interview yesterday for a Trade Management system company for Front Office Business Analyst role. Below questions were kind of tough for me. Can someone answer them for me please?1. Why use futures and why not FRAs in the yield curve construction?I answered liquidity, exchange traded blah blah but the intereviewer was not convinced. that's exactly the main reason (except the blah blah part).FRAs have counterparty risk (because they are OTC) where as futures don't (because they are traded through an exchange), so it is easier to build counterparty risk free curves with futures.right. Didn't he say "exchange traded" though?Futures are by definition exchange traded and forwards are OTC. So saying that futures are exchange traded is not insightful. The term "exchange traded" and "counterparty free" are not equivalent, though one implies the other (if you consider the exchange to have zero probability of defaulting, which is not the case). Both forwards and futures can be liquid and illiquid.