Risk Management interview preparation

Questions

100

Traced to a firm

37

Firms

12

Updated

September 2026

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All firmsUBS14MSCI7BLBlackRock5FTFranklin Templeton3Oaktree Capital Management2Scotiabank2Jane Street1Moody's1Neuberger Berman1PIMCO1SSState Street1TSTruist Securities1

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All topicsMarket risk and VaR14Tail risk and stress testing5Greeks and sensitivities5Credit risk11Counterparty risk and CVA6Operational risk5Model risk and validation6Regulatory capital7Liquidity risk and ALM6Statistics and quant foundations7Indian regulation7Risk governance and appetite4Markets and macro9Fit and career8

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1. 037You just traded a five-year interest rate swap at par. What is your counterparty exposure today and over the life of the trade?Counterparty risk and CVAHardtechnicalBank credit riskDerivatives risk

   Say this

   Today it's zero, because at par the swap has no value to either side. Over its life the expected exposure rises, peaks somewhere around a third of the way in, and then falls to zero at maturity. That humped shape is the thing to be able to draw.

   Then walk it

   1. Two forces set the shape. Diffusion: the longer you wait, the further rates can have wandered, so potential exposure grows with roughly the square root of time. Amortisation: as the swap ages, fewer cash flows remain, so a given rate move is worth less.
   2. Diffusion dominates early and amortisation dominates late, so the profile humps. For a vanilla five-year swap the peak sits around year one and a half to two.
   3. Rough magnitude: the exposure is roughly the DV01 of the remaining swap times a stressed rate move. At year two, three years remain, DV01 on a 100 crore notional is about 2.8 lakh per basis point, and a 95th percentile two-year rate move of maybe 150 basis points gives potential future exposure of roughly 4 crore, so about 4 percent of notional.
   4. Contrast it with a cross-currency swap, where notional is exchanged at maturity, so exposure keeps growing to the end and peaks at maturity. Same product family, completely different profile, and that's the follow-up they'll ask.
   5. The measures to name: current exposure is today's positive mark-to-market. Expected positive exposure is the average of positive exposures over time. Potential future exposure is a high quantile, typically 95 or 99 percent, and effective EPE is the regulatory input to the capital calculation.
   6. What changes the shape in practice: a CSA with daily margin collapses the profile to a few days of margin period of risk, so you're left with gap risk rather than five-year diffusion. Netting against offsetting trades with the same counterparty cuts it further.
   7. And the caveat: all of this is a model output. The distribution of rates you assume, and the margin period of risk you assume in a stressed close-out, move the number by multiples.

   Where candidates lose it

   Saying the exposure is zero because the swap is at par. That's only true today. The question is testing whether you understand exposure as a profile through time, and whether you can name why a cross-currency swap humps differently. Draw the shape if there's a whiteboard.

   Expect next

   • Now draw it for a cross-currency swap.
   • How does a daily-margined CSA change the profile?
   • What is the margin period of risk and what would you assume for it?

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