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YOUR KILLER EQUITIES INTERVIEW QUESTIONS: Explain exotic equity options to an 8 year old in a few lines

Here’s the latest question sent in by site visitors who have attended equities interviews at investment banks. This was allegedly asked in an equity trading interview at JPMorgan. If you disagree with the answer at any point, please express your opinion in the comments box below.

THE QUESTION: Explain exotic equity options to an 8 year old in a few lines

THE ANSWER:

The reality is that there is no real good answer to this: by their very nature these instruments are complex and even to get on to the matter you would have to explain basic optionality first.

The best way to approach it is to drastically simplify everything and give some sort of tangible examples.

For instance: Equity options are like a game where your parents tell you that if it doesn’t rain all week you can eat cake on Sundayif you want (the value of the game is determined or derived by some event and you have the option to participate in the upside but you don’t have to, i.e. you have the option).

Exotic equity options are like your parents saying if it rains on a day of the week that starts with T, you can eat one cake, if its sunny for three days you can eat two more cakes and if it snows, the game ends immediately, they are basically much more complex games (alluding to the greater number of clauses, rebates and knock in/out potential).

Comments (17)

Comments
  1. Maybe if I was 8 I’d understand, as it is I don’t

  2. the best answer from the perspective of the dealer is that “heads I win, tails you lose”.

    Charlie thinks you would be better of going to the casino and putting all you money on red. Your stand a better chance of making something back than to buy a strcutured product linked to an exotic equity structure.

  3. Ali Desai, please just get a job and stop posting useless comments all over this website.

  4. Its a game, where you get prizes if you guess which way the wiggley line goes. You get bigger prizes if you made your guess a couple of months before.

  5. I’ll bet on red

    No, hang on, feeling lucky, Red 19.

  6. You forgot to mention one critical part of the business. Should you move from one set of parents to another you can demand a large (guaranteed) batch of cupcakes to be delivered to you in the new year irrespective of whether it rains or not during the preceding year.

  7. @PE Boy – At least he’s not Henry

    Not Ali but a fan of his work Reply
     
  8. What’s about exotic equity options in cakes?

  9. Sarah, I follow you dearly and I have passionately (silently) defended you from attacks in the past.

    However, this is among your worst articles.

    It _screams_ mediocrity.

  10. The correct answer is

    ” It is impossible I am afraid. These are highly complex financial products which require genius levels of intellect to develop. JP Morgan fights a war for talent to ensure that our clients have access to that talent pool.Now as to our fees….”

    Banking like many professional services is turd polishing. You never want to give the game away. Ever

  11. I often ask “Explain your PhD to an FX Spot trader in a few lines” – this is clearly more challenging than having to explain to an 8-yr old.

  12. @mr1974 – in my defence, I would like to point out that I did not write the answer but that it was provided along with the question by a site visitor. Therefore, either they are mediocre (in your opinion) for providing this, or I am mediocre for running it. Either way, it does – hopefully – provide some indication of the sorts of questions you might encounter if you interview at JPMorgan (allegedly).

    Sarah, Editor, eFinancialCareers Reply
     
  13. better to teach the 8 year old kid to play poker…

  14. Love the article, and the comments.

    I assume that the question is to see if you could explain exotic options, or at least complex financial structures, to a client/prospect. I encounter this every day, and it is not easy. There is a way, but why would I give up my competitive advantage.

  15. A barrier option is a first generation exotic. One can think of a one touch option. So the answer could be: >. It is not an equity, but I guess the point is more explaining the term “exotic option”. Explaining what an equity is already takes more than few lines to a young child.

  16. Tell the interviewer that you cant and then tell him/her to move on to the next question. You won’t get the job but you will get tremendous satisfaction in putting a complete T**t in their place.

  17. I would say, I will not waste my precious time in explaining this this to a 8 year old as he does not have money and he cannot gamble.

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