Although we’ve split the questions into 3 sections please treat the knowledge as cumulative.
So if you’re a newly/part qualified accountant then you should be comfortable with all the questions in the graduate section as well as your own. If you’re already in Product Control then you should be able to answer ALL of the questions below very well.
The list of questions will be updated periodically so check back regulary for updates. Don’t forget our Glossary for any unfamiliar terms.
SECTION A: Graduates
1. What does Product Control do?
We cover this in our Product Control Explained article.
2. Why does a bank have a Product Control Department?
This is also covered in our Product Control Explained article.
3. What controls would you expect to see in Product Control?
There are many you could mention here but the key controls are as follows:
- FOBO Reconciliation (Front Office / Back Office) – This ensures that positions and P&L agree across the Front Office Risk Management system and the Product Control Finance systems.
- Cash Reconciliation – To ensure that the cash in the Product Control system reflects the actual settled cash on any trade. This reconciliation is usually performed by Operations but breaks here will may impact P&L and could also impact the desk’s funding. Remember – Cash Is King!
- Balance Sheet Reconciliation – Can we substantiate our balance sheet? This is a key control to ensure that we understand the balance sheet and can support the balances on it.
- P&L Attribution – Are we able to explain our P&L with reference to market sensitivities and movements? P&L Analysis, Attribution & Commentary are key controls to ensure that we understand what’s driving the P&L. Large unexplained P&L could very well be symptomatic of control issues elsewhere.
- Adjustment Verification – Do we understand and can we support all adjustments posted into the P&L? What needs to happen for them to be released? What systematic issues are causing the need for the adjustments? Are there any long-held adjustments that could represent a write-off into P&L?
4. How does a bank make money?
One of the common banking / finance interview questions. Fundamentally, a bank makes money by earning more interest on its loans to customers than it pays on its customer deposits. Investment Banking revenue in particular is driven by fee & commission income, spreads, interest and mark-to-market movements on inventory.
5. What are the main risks an Investment Bank has to deal with?
Some of these are obvious, some not so:
- Credit: Mainly the risk that our counterparties won’t pay or will default. You can also turn this around and mention the risk that the bank’s own credit rating could be lowered making it more expensive for the bank to borrow funds and thus push up the cost of doing business.
- Market: The risk that our trading positions will be affected by sudden and unexpected market moves.
- Operational: The risk that we suffer a failure in our internal control framework or that our processes aren’t robust enough to prevent a control breach. The consequences of this being a control failure and potential terminal economic loss (as happened with Barings for example).
- Regulatory: Post GFC the regulatory requirements placed on banks have increased substantially. The risk that we fail to comply with our regulatory reporting obligations, breach agreed limits or don’t have an infrastructure that is nimble enough to adapt to the constantly changing regulatory landscape is a risk
- Reputational: The most important of them all and the risk that links back to all of those mentioned above. The reputation of a bank, and the success of its brand are critical to its success.
6. Do you follow the Financial Markets?
A trick question in that there’s only one correct answer. Yes!
Do elaborate; How do you follow them? What do you read? Do you subscribe to a specific website of get email updates on specific sectors ? What interests you about them?
Mention something topical that’s interested you recently. And be prepared to have your bluff called. If you say you follow the equity markets and don’t know to the nearest 100 points where the FTSE closed yesterday then it’s not going to look good. Similarly talk about rate cuts and don’t know what the current base rate is? It’s a long road back.
7. Would you rather have $100 now or $100 in 3 months’ time?
A basic question but one that gets asked. Resist the temptation say you’d rather have it in 3 months’ time as money tends to burn a hole in your pocket. You would of course like it now so you can put it in the bank and earn interest on it. Time value of money and all that.
8. How good are you with Excel?
Excel is a key tool of the Product Controller and a while you’ll pick up a lot of knowledge on the job, a basic proficiency is always desireable. Be honest and don’t oversell your capabilities, especially if you’re interviewing at one of the banks that makes you sit a practical Excel test!
On our resources page we list a couple of great, on-line Excel courses which will quickly get you up to a standard more than adequate to start a Product Control role or sail through a practical Excel test. With over 100 lectures in each course these cover the basics through to VLOOKUP, SUMIF, Pivot Tables and much more!
9. What are the main factors impacting the current markets? How do you see the markets developing over the next 3 months?
An opportunity for you to mention some of the key news stories of recent weeks or months impacting the financial markets. Whether they be related to the GFC, commodity prices, increasing regulation, the Eurozone crisis or interest rate cuts.
SECTION B: Part / Newly Qualified Accountants
THE FOLLOWING SHOULD BE CONSIDERED IN ADDITION TO THE GRADUATE QUESTIONS
10. What is a call option? What is a put option?
Simply put (no pun intended), a call option is the right but not the obligation to purchase a set quantity of an underlying at a specific price on or before a future date. A put option is the right but not the obligation to sell. Read CALL OPTIONS, PUT OPTIONS & BASIC VALUATION for a more detailed walkthrough and some basic payoff graphs.
11. How would you value an option?
One of the more common finance interview questions which you’ll also be able to answer by reading CALL OPTIONS, PUT OPTIONS & BASIC VALUATION.
12. What is Delta?
Questions testing an understanding of delta and the option greeks in general are very common. For a concise and understandable summary read OPTION GREEKS IN PLAIN ENGLISH.
13. How would I hedge a long position in Amazon?
If you’re long Amazon shares then you ‘own’ the shares. To hedge your exposure you therefore want to short Amazon or a proxy.
So you could sell a Amazon future/forward or you could buy a put option on Amazon. Depending on the correlation between Amazon and it’s main index (ie. NASDAQ) you could also sell index futures. Another way to hedge would of course be to sell Amazon shares (which would seem counter-productive but is nevertheless one way to do it).
14. What is a swap?
A vanilla interest rate swap is an agreement under which 2 parties agree to exchange regular cashflows at specific points in time on an agreed notional amount. One party will pay a fixed interest rate and the other will pay a floating interest rate. The actual notional amounts are not exchanged.
15. How would you value a swap?
Cash is king. The value of a swap is simply the present value of all its future cashflows. The rate used to discount these cashflows is crucial and is generally the OIS (overnight index swap) rate. The specific OIS rate used will depend on the currencies of the swap payments and also the currency of any collateral payments agreed between the parties (if a CSA is in place).
16. What are the option greeks?
All the first level greeks are described in OPTION GREEKS IN PLAIN ENGLISH.
17. How would I account for a stock purchase?
How good is your double entry? Let’s assume the following scenario:
a. We buy Stock A for $100 and at the end of Day 1 it’s valued at $102.
b. At the end of Day 2 it’s fallen to $97.
c. At the end of Day 3 it’s back up to $101. We’ll assume a 3 day settlement period.
Day 1 : We’ve bought a stock so we now hold an asset. By the end of the day it has risen in value by $2. Note that the cash has not yet settled on the purchase (as standard settlement is 3 days) but we have a liability for the purchase price.
Dr Inventory $100
Cr Accounts Payable $100
Dr Inventory $2
Cr P&L $2
Day 2: By the end of the day the stock price has fallen to $97, so we have a loss of $5 against the previous day’s closing price.
Dr P&L $5
Cr Inventory $5
Day 3: The stock has rallied to $101. In addition, we settle the cash on the purchase.
Dr Inventory $4
Cr P&L $4
Dr Accounts Payable $100
Cr Cash $100
18. If I hold a bond what risks am I exposed to?
The main risks can be summarised as:
Credit: You run the risk that bond issuer will default and you’ll lose your investment.
Market: You run the risk that the valuation of the position will move against you.
Interest Rate: Variation in interest rate risks will impact the price of the bond.
19. If I hold a bond, how can I hedge my exposure?
This will depend on the specific risks you want to hedge. You could enter into an interest rate swap to hedge out interest rate risk depending on your situation. To hedge your credit exposure to the bond issues you could enter into a credit default swap. This would give you insurance (and a payment) should the issuer suffer a pre-determined credit event. You could hedge your delta using bond futures or you could repo the same bond out.
20. Under IFRS what are the 3 classes of asset? Describe each?
Classification and measurement of Financial Assets is driven by ‘IFRS9 – Financial Instruments’. This was completed in July 2014 and replaces the previous guidance under IAS39.
Whereas IAS39 had 3 classes of asset, IFRS9 has only 2:
- Financial assets at fair value through profit or loss
- Available-for-sale financial assets
- Loans and receivables
- Held-to-maturity investments
- Amortized cost
- Fair value through profit or loss (FVPL)
21. What is a derivative?
Under IAS there are three features which define a derivative:
a) The value of the instrument changes in response to an underlying variable (eg. an equity or commodity)
b) There is no initial investment (or one that is smaller than would normally be required for a similar contract with the same response to market factors)
c) It is settled at a future date
SECTION C: Product Controllers
THE FOLLOWING SHOULD BE CONSIDERED IN ADDITION TO THE GRADUATE & NEWLY QUALIFIED QUESTIONS
22. If I’m long a call option then am I long or short delta/gamma/theta/vol ?
This is explained in more detail in OPTION GREEKS IN PLAIN ENGLISH. See the table below for a high level summary. The rule of thumb is that if you’re long an option (whether it be a call or a put) you’re always long gamma and always short theta.
Long Call / Short Call Exposures
23. What is a repo? How would you account for it?
A repo is a ‘sale and repurchase’ agreement which behaves in substance like a securitised loan. You lend a bond to a counterparty in exchange for cash for a specific time period. At the end of the period you return the cash and receive the bond back. During the agreement you will pay repo interest to the counterparty which is effectively interest on the cash sum you’ve borrowed.
Because the bonds are always returned, for accounting purposes they never leave the balance sheet of the lender. The repo is accounted for as a liability on the balance sheet (as you have to return the cash) and the interest payments go straight through P&L. This is an example of substance over form accounting.
Repo’s are used for financing purposes. If a bank has a surplus of bonds it can repo them out and receive cash in, the interest paid on the repo being at a lower rate than other sources of funding.
24. What is P&L Attribution and what categories would you use?
P&L Attribution , also known as P&L explain is the name given to reporting of P&L into various buckets on order to understand the drivers. The main categories are:
Market Moves: ie. Delta, Vega, Gamma, Basis, Theta.
Interest & Funding: ie. Repo Accrual, Bond Coupon, Funding charges.
New Trades: Usually broken down into Trading P&L, Sales Commission and Brokerage
Revenue Transfers: ie. Revenue Sharing agreements, transfer pricing.
That covers the most common technical Product Control / banking finance interview questions.
We will be updating this list periodically so check back again for updates. If there are specifc areas you would like covered or if there are questions you’ve been asked that aren’t currently on the list then please let us know!
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