Here’s the latest question sent in by site visitors who have attended equities interviews at investment banks. This was allegedly asked in an equities index arbitrage trading interview at Credit Suisse. If you disagree with the answer at any point, please express your opinion in the comments box below.
THE QUESTION: There are 10 seconds to go in a basketball game, you trail by 2 points, what do you do?
The answer to this question depends on your basketball abilities. Personally. I’m pretty good at basketball, so I fancied my chances. I said I’d make some space and shoot for the 3 points.
However, the interviewer said I should go to the basket, make my two points and take the game into overtime.
This way I’d extend the life of the game (option) and can then win in over time (i.e. you increase your chances of the option being in the money). He was trying to relay the message of the time value of money in optionality basically, but my argument was from a more practical perspective, i.e. you could still lose in overtime so why not go for broke?
In hindsight, he was obviously looking for some sense of sound risk management strategy, i.e. assigning probabilities to the outcomes, my chances of making 2 points are 1/2, my chances of making the 3 are 1/3, my chances of winning in overtime are… whatever, but I got a little caught up in the basketball part :-)).
Although I think if he had of phrased the question differently, it could have been an excellent question, for example: ‘If a basketball game is the equivalent to a binary option, with a payout if you win and nothing if you lose and there is 10 seconds to go in a game, in which you trail by 2 points, what do you do?’