Risk Management interview preparation

Questions

100

Traced to a firm

37

Firms

12

Updated

September 2026

Asked at

All firmsUBS14MSCI7BLBlackRock5FTFranklin Templeton3Oaktree Capital Management2Scotiabank2Jane Street1Moody's1Neuberger Berman1PIMCO1SSState Street1TSTruist Securities1

Topic

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

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseBrainteaserMarket viewFit

1. 013Take me through the basic concepts in market risk. What are the main types?Market risk and VaRCorephone / first roundScotiabankRisk · Toronto · 2025

   Say this

   Market risk is the risk of loss from moves in market prices, and it splits by the factor driving it: interest rate, equity, foreign exchange, credit spread and commodity. Then volatility risk sits across all of them once you hold options.

   Then walk it

   1. Interest rate risk is usually the biggest for a bank, and it has shape as well as level: parallel shifts, steepening and flattening, and basis between curves.
   2. Credit spread risk is separate from interest rate risk even though both show up in a bond price. One is the risk-free curve moving, the other is the spread over it, and they often move in opposite directions in a flight to quality.
   3. Equity, FX and commodity risk are more straightforward directionally, but FX carries a funding dimension too, because a cross-currency basis move hits you even with no net FX position.
   4. Volatility risk comes free with any option book: vega for the level of implied vol, and then the shape, skew and term structure.
   5. Then the two that candidates forget. Basis risk, where your hedge and your exposure are driven by different but correlated factors. And market liquidity risk, where the price you can actually transact at is worse than the mark.
   6. The way a desk measures all of it is sensitivities plus VaR plus stress. Sensitivities for daily trading decisions, VaR for aggregation and limits, stress for the scenarios VaR can't see.

   Where candidates lose it

   Giving four factor names and stopping. Two things lift the answer: separating credit spread risk from interest rate risk, and naming basis risk and market liquidity risk as market risks in their own right. Those are the ones that actually generate P&L surprises.

   Expect next

   • Which of those is largest for a commercial bank, and why?
   • Is credit spread risk market risk or credit risk?
   • Now tell me about counterparty credit risk.

   Reported by candidates at Scotiabank (Risk, Toronto, 2025). Source: Wall Street Oasis.

2. 015What is stress testing, and how is it different from VaR?Tail risk and stress testingIntermediatetechnicalBank market riskRegulatory reporting

   Say this

   VaR is statistical and stress testing is conditional. VaR asks what the distribution of outcomes looks like given recent history; stress testing asks what happens if this specific thing occurs, with no probability attached. They answer different questions and neither substitutes for the other.

   Then walk it

   1. VaR is probabilistic and backward-looking. It needs history and it gives you a likelihood. Stress testing is a what-if: rates up 300 basis points, equities down 40 percent, the rupee at 95, and here is the P&L.
   2. Stress testing lets you ask about things that have never happened. VaR structurally cannot, because it has no data on them.
   3. It also handles non-linearity honestly. A large prescribed shock reveals gamma and correlation breakdown that a one-day 99% move never touches.
   4. Three flavours worth naming: sensitivity tests on one factor at a time, scenario tests with a coherent joint move across many factors, and reverse stress tests that start from failure and work backwards.
   5. The weakness is that stress testing has no probability. A scenario that loses $2bn is only actionable if you have a view on how likely it is, and scenario design is where the judgement, and the political pressure, sits.
   6. In practice the two are complements at different confidence levels. VaR and expected shortfall set day-to-day limits; stress tests and ICAAP set capital and inform the risk appetite. A bank that only ran VaR in 2007 saw nothing coming.

   Where candidates lose it

   Framing stress testing as 'a bigger VaR'. It isn't a confidence level, it's a different epistemology: conditional and judgement-driven rather than statistical. And you should volunteer the weakness, that scenarios carry no probability, before being asked.

   Expect next

   • Who should design the scenarios, risk or the business?
   • How do you stop scenario design becoming a negotiation?
   • What is reverse stress testing?
3. 017What is reverse stress testing, and why do supervisors like it so much?Tail risk and stress testingIntermediatetechnicalBank market riskRegulatory reporting

   Say this

   You start from the outcome, business failure, and work backwards to find what would cause it. Supervisors like it because it removes the bank's ability to choose a comfortable scenario. You can't pick a shock that happens to be survivable if the shock is defined as the one you don't survive.

   Then walk it

   1. Define failure first, and precisely. Not just insolvency, but the point where the business model is no longer viable: CET1 through the requirement, or losing access to wholesale funding, or a rating downgrade that kills the franchise.
   2. Then solve for the scenario. Search across risk factors for combinations that get you there, and rank them by plausibility rather than by size.
   3. The output is not a loss number. It's a set of vulnerabilities and a judgement on whether the required shock is remote or uncomfortably close. If your bank fails on a 120 basis point spread widening, that's an urgent finding no matter what probability you assign.
   4. It's also how you find concentrations nobody wrote down. Reverse stress testing frequently surfaces that failure runs through one funding counterparty, one collateral type, or one country, which no forward scenario was built to test.
   5. Then it feeds the recovery plan. Each identified path needs a management action and a trigger, which is the actual regulatory point. It's a bridge between risk measurement and resolution planning.
   6. The hard part, and worth saying: the search space is enormous and the answer is sensitive to which factors you allow to move together. The exercise is only as honest as the people running it, and it's very easy to make the required shock look implausible.

   Where candidates lose it

   Describing it as 'a very severe stress test'. Severity isn't the distinguishing feature, direction is. Forward tests go from cause to effect, reverse tests go from failure to cause. And if you don't define failure precisely at the start, the exercise has no answer.

   Expect next

   • How would you define failure for a broker-dealer versus a deposit-taking bank?
   • What do you do with the output?
   • How do you stop management dismissing the scenario as implausible?
4. 020Explain the Greeks to me.Greeks and sensitivitiesCoretechnicalBank market riskDerivatives risk

   Say this

   They're the partial derivatives of an option's value with respect to each input. Delta is sensitivity to spot, gamma is how delta changes, vega is sensitivity to implied volatility, theta is time decay and rho is sensitivity to rates.

   Then walk it

   1. Delta, first derivative in spot. Roughly 0.5 for an at-the-money option, and it's also the hedge ratio, so it tells you how much stock to short.
   2. Gamma, second derivative in spot. It's the curvature, it's largest at the money and near expiry, and it's the reason a static delta hedge stops working when the market moves.
   3. Vega, sensitivity to implied vol. Largest for long-dated at-the-money options, because there's more time for volatility to matter. A one-point vol move on a big vega book is real money.
   4. Theta, the passage of time. A long option position bleeds theta and collects gamma; a short position collects theta and is short gamma. That trade-off is the whole economics of an option book.
   5. Rho for rates, and for anything with a dividend or a carry you also need the sensitivity to that. On FX options you have two rho-like terms, one per currency.
   6. From a risk seat the ones that cause incidents are gamma and vega, not delta. Delta is easy to see and easy to hedge. Gamma and vega are where a book that looks flat loses money.

   Where candidates lose it

   Reciting definitions without saying which ones matter to a risk manager. Delta is the one traders talk about and the one risk cares least about, because it's hedgeable intraday. Say that gamma and vega are where the losses come from and you sound like you've sat on a desk.

   Expect next

   • Which Greek is hardest to hedge, and why?
   • What is the relationship between gamma and theta?
   • How would you set a limit framework on an options book?
5. 022Which equities have duration?Greeks and sensitivitiesHardtechnicalBLBlackRockRisk and Quantitative Analysis · New York · 2026

   Say this

   Equity duration is how sensitive a stock's price is to the discount rate, and it's driven by how far out the cash flows sit. Long-duration equities are the ones whose value is mostly terminal value: high-growth tech, biotech with no earnings, and long-dated infrastructure and utilities.

   Then walk it

   1. Mechanically it's the same idea as bond duration. Discount cash flows, compute the weighted average time to those cash flows, and that's your rate sensitivity. A company earning nothing today with all the value in year fifteen has enormous duration.
   2. So the long-duration buckets: unprofitable growth software, early-stage biotech, anything valued on a distant terminal value, plus regulated utilities and infrastructure where the cash flows are bond-like and stretch for decades.
   3. The short-duration buckets: value names, banks, energy, cyclicals with high near-term free cash flow and low reinvestment. Their value is front-loaded, so the discount rate matters less.
   4. The empirical check: 2022 is the cleanest natural experiment. As real yields rose, the Nasdaq underperformed value by a huge margin even though earnings held up. That is duration doing the work, not fundamentals.
   5. There's a twist that matters for a risk seat: for financials the rate effect goes the other way through earnings. Banks' net interest margins improve with rates, so their effective duration can be negative. You can't apply a single sign to the whole market.
   6. And utilities are the interesting case, because they have long-duration cash flows and leverage, so they trade as rate proxies. Many managers hold them as bond substitutes and then get surprised when they behave like bonds.

   Where candidates lose it

   Treating this as a trick question or saying equities don't have duration. The interviewer is testing whether you can move a fixed income concept into equities and name the cohorts. And the answer that stands out mentions financials as the exception where the sign flips.

   Expect next

   • Why did long-duration equities sell off so hard in 2022?
   • Do banks have positive or negative equity duration?
   • How would you hedge the rate sensitivity of a growth equity portfolio?

   Reported by candidates at BlackRock (Risk and Quantitative Analysis, New York, 2026). Source: Wall Street Oasis.

6. 023Explain duration and convexity.Greeks and sensitivitiesCoretechnicalBank market riskTreasury and ALM

   Say this

   Duration is the first-order sensitivity of a bond's price to yield, convexity is the second-order correction. Duration is the slope of the price-yield curve and convexity is its curvature, which is why a duration-only estimate always understates the price rise and overstates the fall.

   Then walk it

   1. Macaulay duration is the weighted average time to cash flow, in years. Modified duration is that divided by one plus the yield, and it's the one you use: price change is roughly minus modified duration times the yield change.
   2. Worked number: a bond with modified duration of 7 and a 100 basis point yield rise loses about 7 percent. With convexity of 60, you add half times 60 times 0.01 squared, which is 0.3 percent, so the real loss is closer to 6.7 percent.
   3. Convexity is positive for a plain vanilla bond, which is good for the holder. Your gains from a rally exceed your losses from an equal sell-off.
   4. Negative convexity is the thing to watch. A callable bond or a mortgage-backed security has it, because when rates fall the issuer or homeowner prepays and you don't get the upside. That's the whole story of mortgage hedging, and it's why MBS books need dynamic hedging.
   5. Duration also assumes a parallel shift. A steepening curve can hurt you badly on a barbell that looks duration-matched, which is why you look at key rate durations by bucket, not one number.
   6. And the term to have ready: DV01, or price value of a basis point, is the same idea in money rather than percent, and it's what a rates desk actually manages to.

   Where candidates lose it

   Defining duration as 'time to maturity'. It isn't, except for a zero-coupon bond, and the interviewer is listening for that error. The second differentiator is negative convexity on callables and mortgages, because that's where the real risk management problem sits.

   Expect next

   • What is DV01?
   • Why does a mortgage-backed security have negative convexity?
   • Two portfolios have the same duration. How can their risk differ?
7. 024What is basis risk? Give me an example.Greeks and sensitivitiesIntermediatetechnicalBank market riskTreasury and ALM

   Say this

   Basis risk is the risk that your hedge and your exposure don't move together, so you're left with residual P&L even though you think you're flat. It's what's left after you've hedged the first-order factor.

   Then walk it

   1. The classic example: you hold a corporate bond and hedge the rate risk with a government bond future. Now you're exposed to the spread between corporate and government yields, which is exactly the thing that moves in a credit event.
   2. Product basis: hedging a jet fuel exposure with crude futures because jet fuel futures are illiquid. The crack spread becomes your risk, and airlines have lost real money on that.
   3. Tenor and calendar basis: hedging a three-month exposure with a one-month contract and rolling. Each roll re-prices the basis, and in a stressed market that roll cost blows out.
   4. Location and currency basis: cross-currency basis on a dollar funding swap. In March 2020 that basis widened by more than 100 basis points, which made hedged dollar funding dramatically more expensive for non-US banks holding dollar assets.
   5. In a bank's banking book it shows up as repricing basis: your loans reprice off the repo-linked benchmark and your deposits reprice off something else entirely, so a rate move that looks neutral on a gap report still hits net interest margin.
   6. The way you manage it is to measure it explicitly, set a separate basis limit, and stress it. The failure mode is that VaR often shows a hedged book as low risk because the basis has been quiet, right up until it isn't.

   Where candidates lose it

   Defining it abstractly without a concrete pair. Interviewers want an instrument and its hedge named. And the risk-manager point to add is that basis risk is systematically understated by VaR, because the basis is stable for long stretches and then jumps.

   Expect next

   • How would you measure and limit basis risk?
   • Why does VaR tend to understate it?
   • What happened to cross-currency basis in March 2020?
8. 025Explain PD, LGD and EAD.Credit riskCorephone / first roundBank credit riskRating agencies

   Say this

   They're the three inputs to expected loss. Probability of default is how likely the borrower stops paying, loss given default is the fraction you don't recover, and exposure at default is how much is outstanding when it happens. Multiply the three and you have expected loss.

   Then walk it

   1. PD is a probability over a horizon, usually one year, and it comes from a rating or a scorecard. Say the horizon, because a one-year PD and a lifetime PD are very different numbers.
   2. LGD is one minus the recovery rate, expressed on the exposure. It's driven by collateral, seniority and how good the legal enforcement regime is. Senior secured on a warehouse in a good jurisdiction might be 25 percent; unsecured sub debt is 70 to 90.
   3. EAD is what's actually outstanding at default. For a term loan it's roughly the drawn balance. For a revolver or a credit card it's the drawn amount plus a credit conversion factor on the undrawn part, because stressed borrowers draw their lines down before they default.
   4. Worked number: a 100 crore facility, PD of 2 percent, LGD of 40 percent gives expected loss of 0.8 crore, so 80 basis points. That's a provisioning and pricing number, not a capital number.
   5. The three are not independent, and that's the bit people miss. In a recession PD rises and recoveries fall at the same time, because collateral values are down and everyone is selling. That's downturn LGD, and Basel requires you to use it rather than a long-run average.
   6. For a derivative there's no drawn balance, so EAD has to be modelled from potential future exposure. That's a different exercise entirely, and it's why counterparty credit risk has its own framework.

   Where candidates lose it

   Getting the definitions right and missing that PD and LGD are correlated. Using an average recovery rate through a downturn understates loss badly, and downturn LGD is a specific Basel requirement. Also state the PD horizon; a PD without a horizon is not a number.

   Expect next

   • Why does Basel require downturn LGD?
   • How do you estimate EAD on a revolver?
   • How would you estimate PD for a borrower with no rating?
9. 026What's the difference between expected and unexpected loss, and which one does capital cover?Credit riskCoretechnicalBank credit riskRegulatory reporting

   Say this

   Expected loss is the average you lose in a normal year, and it's covered by provisions and priced into the loan spread. Unexpected loss is the deviation above that in a bad year, and that's what capital is for. Provisions cover the mean, capital covers the tail.

   Then walk it

   1. Expected loss is PD times LGD times EAD. It's a cost of doing business, so it belongs in the price. If your spread doesn't cover EL plus funding plus operating cost plus a return on capital, you're lending at a loss.
   2. Unexpected loss is the distance from the mean to a high quantile of the loss distribution, usually 99.9 percent over one year in Basel's IRB framework. That's the one-in-a-thousand-year bad year the bank is supposed to survive.
   3. The distribution is heavily right-skewed, not normal, because defaults are correlated. Most years you lose a little, occasionally you lose a lot, and the asymmetry is driven entirely by that correlation.
   4. The mechanism is the asset correlation assumption. If defaults were independent, a large portfolio would have almost no unexpected loss and you'd need almost no capital. Basel's IRB formula bakes in correlations of roughly 12 to 24 percent for corporates, and it's that number, not PD, that creates the capital requirement.
   5. Numerical feel: a portfolio with 80 basis points of expected loss might carry a 99.9 percent loss of 5 or 6 percent. So capital is several times provisions, and that ratio widens for a concentrated book.
   6. The gap that matters in practice: IFRS 9 provisions and Basel expected loss are computed differently, so the two rarely agree, and the shortfall or excess adjusts CET1. That reconciliation is a real job in a bank's finance and risk function.

   Where candidates lose it

   Saying capital covers expected loss. It doesn't, provisions do, and mixing those up is a hard fail in a credit risk interview. The answer that stands out names asset correlation as the thing generating unexpected loss, because a candidate who says that understands why a diversified book still needs capital.

   Expect next

   • Why is the loss distribution skewed?
   • What drives the size of unexpected loss more, PD or correlation?
   • How does the IFRS 9 provision interact with regulatory capital?
10. 029What is the difference between a point-in-time and a through-the-cycle rating, and when does it matter?Credit riskIntermediatetechnicalBank credit riskRating agencies

    Say this

    A point-in-time PD reflects the borrower's risk right now, including where we are in the cycle. A through-the-cycle rating strips the cycle out and asks how the borrower would do on average across one. PIT moves a lot, TTC barely moves.

    Then walk it

    1. Agency ratings are broadly through-the-cycle by design. That's why an investment grade issuer doesn't get downgraded every recession, and why agencies talk about rating through a trough.
    2. IFRS 9 needs point-in-time, because expected credit loss is supposed to be a current, forward-looking estimate conditioned on today's macro forecast.
    3. Basel IRB regulatory capital leans through-the-cycle, deliberately, to stop capital requirements swinging with the cycle. If PDs were fully PIT, RWAs would balloon in a recession precisely when banks can't raise capital.
    4. That's the procyclicality argument and it's the real content of this question. A PIT capital regime amplifies the cycle: losses rise, RWAs rise, capital ratios fall twice over, lending contracts, the recession deepens.
    5. The practical consequence is that a bank runs two PD scales and a mapping between them, and the conversion is genuinely hard. You need a macro model to shift a TTC PD to a PIT PD for a given scenario.
    6. The honest caveat: no real rating system is purely one or the other. Agency ratings do migrate in downturns, and IRB models do have cyclical components. It's a spectrum, and the useful question about any model is how much of the cycle it passes through.

    Where candidates lose it

    Defining both and not explaining why anyone cares. The payoff is procyclicality: why regulators want TTC for capital and accountants want PIT for provisions, and why the same borrower carries two different PDs in the same bank on the same day.

    Expect next

    • Which does IFRS 9 need, and why?
    • How would you convert a TTC PD to a PIT PD?
    • Is procyclicality a real problem or a theoretical one?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.