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. 031How does IFRS 9 expected credit loss differ from Basel regulatory expected loss?Credit riskHardsuperdayBank credit riskRegulatory reporting

   Say this

   Different purposes, so different parameters. IFRS 9 is accounting: point-in-time, forward-looking, neutral, and lifetime for Stage 2 and 3. Basel is prudential: through-the-cycle PD, downturn LGD, twelve-month horizon, and deliberately conservative.

   Then walk it

   1. Horizon. Basel EL is always twelve months. IFRS 9 is twelve months in Stage 1 and lifetime in Stages 2 and 3.
   2. PD. Basel wants a long-run average, through-the-cycle PD. IFRS 9 wants a point-in-time PD conditioned on a macro forecast.
   3. LGD. Basel requires downturn LGD, a stressed recovery assumption. IFRS 9 wants a neutral, expected LGD with no prudential margin.
   4. Discounting. IFRS 9 discounts cash shortfalls at the effective interest rate. Basel EL is undiscounted.
   5. Then the reconciliation, which is where real work happens. For IRB banks, if accounting provisions exceed Basel EL, the excess counts in Tier 2 up to a cap of 0.6 percent of credit RWA. If provisions fall short, the shortfall is deducted straight from CET1. So the two frameworks meet in the capital ratio.
   6. For standardised-approach banks it's different again: general provisions can count in Tier 2 up to 1.25 percent of credit RWA, and specific provisions reduce the exposure value.
   7. And the transitional arrangements matter historically. When IFRS 9 came in, supervisors allowed a phase-in of the day-one CET1 hit precisely because the provision increase was large enough to be destabilising.

   Where candidates lose it

   Treating them as the same number with different labels. Naming the four parameter differences is table stakes; the answer that lands explains the CET1 shortfall deduction and the Tier 2 excess cap, because that's the bit that actually affects a bank's capital ratio.

   Expect next

   • What happens to CET1 if provisions are below Basel EL?
   • Why is Basel LGD downturn and IFRS 9 LGD neutral?
   • Which framework produced a bigger provision in 2020?
2. 032What is structured finance, how would you evaluate it, and what are the credit risks?Credit riskHardtechnicalMoody'sCredit Risk · New York · 2024

   Say this

   Structured finance is taking a pool of cash-flow-generating assets, putting it in a bankruptcy-remote vehicle, and slicing the cash flows into tranches of different seniority. You evaluate it in three layers: the collateral, the structure, and the parties.

   Then walk it

   1. Layer one, the collateral. Pool composition, weighted average life, seasoning, geographic and obligor concentration, historical default and prepayment behaviour, and how the underwriting was done. Everything downstream depends on this, and it's where the 2007 failure actually was.
   2. Layer two, the structure. Where does the cash go, and in what order. Credit enhancement comes from subordination, excess spread, overcollateralisation and reserve accounts. Then the triggers: performance triggers that turn a pro-rata waterfall sequential, and cash-trapping mechanics.
   3. Layer three, the parties. Originator, servicer, trustee, swap counterparty. Servicer quality drives recoveries, and servicer failure has broken deals whose collateral was fine. Then the legal question: is the true sale robust, and is the SPV actually bankruptcy remote?
   4. How I'd analyse it: model the pool, run default and prepayment scenarios, and see at what cumulative loss each tranche takes its first rupee of loss. That break-even loss compared with the expected loss is the real measure of a tranche's safety.
   5. The credit risks specific to tranching. Correlation risk: a senior tranche is a bet on correlation, not just on average defaults, because it only fails if losses cluster. Cliff risk: a mezzanine tranche goes from untouched to wiped out over a narrow loss range, so it's far more convex than its rating suggests.
   6. Then prepayment and extension risk on the timing, basis risk if the assets and liabilities reprice off different benchmarks, and originator alignment. Skin in the game is why post-crisis rules require the sponsor to retain a slice.
   7. The Indian version worth naming: pass-through certificates and direct assignments on NBFC loan pools, where the live risks are servicer concentration, priority-sector motivation on the buyer side, and the 2018 to 2019 NBFC liquidity episode showing how quickly refinancing assumptions fail.
   8. And the honest limitation: the rating of a structured tranche is far more model-dependent than a corporate rating. Small changes in a correlation assumption move a AAA to a BBB, and that is exactly what happened to CDOs.

   Where candidates lose it

   Explaining tranching and stopping. The two things a credit risk interviewer at a rating agency wants are the sensitivity of senior tranches to correlation rather than to average default rates, and the cliff-risk convexity of mezzanine. Naming the servicer and the true-sale question shows you've read a deal document, not a textbook.

   Expect next

   • Why is a senior tranche a bet on correlation?
   • What actually went wrong with CDO ratings in 2007?
   • How would you analyse an Indian NBFC pass-through certificate?

   Reported by candidates at Moody's (Credit Risk, New York, 2024). Source: Wall Street Oasis.

3. 033Your loan book has 22 percent of exposure in commercial real estate. How do you think about that?Credit riskIntermediatetechnicalBank credit riskIndian bank risk and treasury

   Say this

   Concentration is the risk that diversification math ignores, and 22 percent in one cyclical sector is a real number. I'd measure it, work out how much of a tail loss it drives, then decide between limits, hedging and pricing rather than just flagging it.

   Then walk it

   1. Measure it properly first. Sector share is the headline, but the useful metrics are a Herfindahl index on single names, the top-20 exposure as a share of CET1, and the correlated cluster, because CRE developers, construction firms and building materials all fail together.
   2. Then quantify the capital impact. The IRB formula assumes an infinitely granular, single-factor portfolio, so it systematically understates concentrated books. A granularity adjustment or a multi-factor economic capital model is how you show the board the real number, and this is a classic Pillar 2 add-on.
   3. Stress it specifically. Property values down 30 percent, vacancy up, refinancing unavailable at maturity. CRE defaults are refinancing events far more than they are cash-flow events, so the maturity profile matters more than current interest coverage.
   4. Look at what's inside the 22 percent. Office in one city is a different animal from warehousing and retail across ten. Loan-to-value distribution, debt-service coverage, single-tenant concentration, and how much matures in the next 18 months.
   5. Then the actions, in order of cost. Tighten new-origination limits by sub-sector, price the concentration into new deals, syndicate or sell down the largest names, and buy protection or securitise if a market exists. In India that last option is thin, so limits do most of the work.
   6. And the governance line: 22 percent may be entirely within appetite if the board decided that deliberately and is paid for it. Concentration isn't automatically a fault. What is a fault is concentration that accumulated without anyone setting a limit.

   Where candidates lose it

   Saying 'that's too high' without a benchmark or a measurement. And forgetting that the IRB capital formula assumes a granular portfolio, so regulatory capital alone will not show the concentration. That granularity point is what a credit risk interviewer is waiting for.

   Expect next

   • How would you measure concentration in a single number?
   • Why doesn't the IRB formula capture it?
   • What limit would you set, and on what basis?
4. 034Describe what distressed debt is.Credit riskIntermediatetechnicalOaktree Capital ManagementRisk · Los Angeles · 2022

   Say this

   Debt of a company in or near financial distress, trading at a deep discount, usually quoted in cents on the dollar rather than on a yield. The convention is a spread over 1,000 basis points or a price under 70, and the analysis shifts from yield to recovery.

   Then walk it

   1. The mental switch is the key point. For performing credit you underwrite the probability of getting paid the coupon. For distressed you underwrite what the asset is worth in a restructuring and where in the capital structure you sit when it's divided up.
   2. So the work is a valuation exercise plus a legal one. Build an enterprise value under a restructured plan, then walk the waterfall: secured, then unsecured, then sub debt, then equity. The fulcrum security is the one where value runs out, and owning it is how you end up controlling the reorganised equity.
   3. Two strategies, and they're different businesses. Passive: buy mispriced paper and wait. Active or loan-to-own: buy the fulcrum, lead the creditor committee, negotiate the plan, convert to equity.
   4. Risk factors specific to it: process risk, because the outcome depends on a court and on other creditors, not just on the business. Duration risk, because restructurings take years. Illiquidity. And documentation risk, since covenant and intercreditor terms often matter more than the financials.
   5. From a risk-management seat in a distressed fund, the hard problems are valuation of assets with no observable price, position concentration, the fact that VaR is meaningless on paper that doesn't trade, and side-pocket or gate mechanics if investors want out.
   6. The Indian dimension is worth a line: the Insolvency and Bankruptcy Code created a real distressed market after 2016, with ARCs and stressed-asset funds buying from banks. Average haircuts through the IBC have been steep and resolution timelines have run well past the statutory 330 days, which is exactly the process risk you're underwriting.

   Where candidates lose it

   Defining it by price alone and never mentioning the fulcrum security or the capital structure waterfall. Distressed investing is a legal and structural discipline as much as a financial one, and a candidate who can't say what a fulcrum security is has read a definition, not a deal.

   Expect next

   • What is the fulcrum security and why do you want it?
   • How would you value a company in bankruptcy?
   • How would you risk-manage a portfolio of illiquid distressed positions?

   Reported by candidates at Oaktree Capital Management (Risk, Los Angeles, 2022). Source: Wall Street Oasis.

5. 035Explain the Merton model, and the difference between structural and reduced-form credit models.Credit riskHardtechnicalBank credit riskModel validation

   Say this

   Merton treats equity as a call option on the firm's assets with a strike equal to its debt. Default happens when asset value falls below debt at maturity, so you can back out a default probability from the equity price and its volatility. That's the structural family; reduced-form models skip the story and fit default intensity straight from market spreads.

   Then walk it

   1. The Merton set-up: firm assets follow a lognormal process, equity holders own a call with strike equal to the debt face value, and default probability is the chance the asset value ends below that strike. Distance to default is how many asset standard deviations you are above the barrier.
   2. The clever part is that it's forward-looking and uses market data. Equity prices update every second, so a structural PD reacts long before a rating agency does. That's what Moody's KMV commercialised as EDF.
   3. Its weaknesses are specific. It underpredicts short-term default because the asset process is continuous and can't jump. It needs asset value and asset volatility, neither of which is observable. It assumes one debt maturity. And it produces credit spreads well below observed ones, the credit spread puzzle.
   4. Reduced-form, or intensity models like Jarrow-Turnbull and Duffie-Singleton, take default as an exogenous Poisson-type event with a hazard rate calibrated from CDS or bond spreads. No story about why the firm defaults, just a fit to prices.
   5. So the trade-off: structural models explain and give you economic intuition and a link to the equity market. Reduced-form models fit market prices and are what you use to value and hedge credit derivatives.
   6. In practice a bank uses both and for different jobs. Structural or hybrid models for wholesale PD estimation and early warning; reduced-form for pricing and for CVA. And the risk-management caveat: a structural model's PD spikes whenever equity vol spikes, so it's cyclical and noisy, which is fine as an early warning signal and bad as a provisioning input.

   Where candidates lose it

   Describing equity as a call option and stopping. The interviewer will ask what's wrong with Merton, and 'it underpredicts short-horizon default because assets can't jump' plus 'asset value and asset volatility aren't observable' are the answers. Also be able to say which model you'd use for pricing versus for PD estimation.

   Expect next

   • What is distance to default?
   • Why does Merton understate short-term default risk?
   • Which would you use to price a CDS?
6. 036What is counterparty credit risk?Counterparty risk and CVACorephone / first roundScotiabankRisk · Toronto · 2025

   Say this

   It's the risk that the other side of a derivative or a securities financing trade defaults while the trade is in your favour. What makes it different from loan credit risk is that the exposure isn't a fixed amount: it's market-driven, two-sided, and it changes every day.

   Then walk it

   1. With a loan you know the exposure, it's the balance outstanding. With a swap, the exposure is the replacement cost, which can be zero today, in your favour tomorrow, and against you next week.
   2. That's why exposure has to be modelled rather than read off a ledger: current exposure is today's mark-to-market if positive, and potential future exposure is a high quantile of what it could become over the life of the trade.
   3. It's a hybrid of credit and market risk, which is why it sits awkwardly in bank org charts. You need a credit view on the counterparty and a market view on the exposure profile, and the interaction of the two is where the hard part lives.
   4. Mitigants in order of power: netting agreements under an ISMA or ISDA master, collateral and margin under a CSA, then central clearing, then break clauses and downgrade triggers.
   5. The specific flavour that catches people out is wrong-way risk, where the exposure grows precisely as the counterparty's credit deteriorates. That's not a diversifiable add-on, it's a fundamental change in the shape of the loss distribution.
   6. And the capital and pricing angle: CVA is the market price of this risk and it sits in the P&L. After 2008, Basel added a CVA capital charge because two-thirds of crisis counterparty losses were mark-to-market CVA losses rather than actual defaults.

   Where candidates lose it

   Describing it as 'credit risk on a derivative' and stopping. The distinguishing feature is that the exposure is stochastic and two-sided, and if you can't say that you can't explain why the discipline needs its own modelling. Name netting, collateral and wrong-way risk without being prompted.

   Expect next

   • How do you measure the exposure if it changes daily?
   • What is wrong-way risk?
   • Why does central clearing help, and what does it cost?

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

7. 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?
8. 038What is CVA, and who ends up paying for it?Counterparty risk and CVAIntermediatetechnicalBank credit riskDerivatives risk

   Say this

   Credit valuation adjustment is the market value of counterparty default risk on a derivative: the discounted expected loss if they default, integrated over the life of the trade. It's a deduction from the risk-free value of the trade, and the client pays it in the price.

   Then walk it

   1. The formula in words: for each future time bucket, take the expected positive exposure, multiply by the marginal probability of default in that bucket and by loss given default, discount, and sum. Exposure from the market model, default probability from the CDS curve.
   2. It's a P&L line, not just a risk number. A CVA desk holds it, marks it daily, and hedges the credit component with CDS and the market component with the underlying. When a client's spread widens, the CVA desk takes a loss that day even if nobody defaults.
   3. DVA is the mirror image, the adjustment for your own default risk, which is a gain to you. It's controversial precisely because your P&L improves as your own credit deteriorates, which is an uncomfortable thing to book.
   4. Then FVA for the funding cost of uncollateralised trades, MVA for initial margin funding, and KVA for the capital. Collectively the XVAs, and pricing a derivative now means pricing all of them.
   5. Who pays: the client, embedded in the spread quoted. That's why an uncollateralised corporate client pays materially more for the same swap than a hedge fund posting daily margin. The corporate is often shocked by that and it's a real commercial conversation.
   6. The number worth knowing: Basel added a CVA capital charge after the crisis because roughly two-thirds of counterparty credit losses in 2008 to 2009 were CVA mark-to-market losses rather than actual counterparty failures. That's why it's capitalised separately from default risk.

   Where candidates lose it

   Describing CVA as a reserve rather than a traded, hedged, marked-daily P&L line. And the detail that shows real understanding is that CVA depends on the correlation between exposure and the counterparty's credit, which is wrong-way risk, so a simple product of independent expectations is an approximation.

   Expect next

   • What is DVA and why is it controversial?
   • How would you hedge CVA?
   • Why does a collateralised counterparty get a better price?
9. 039What is wrong-way risk? Give me a real example.Counterparty risk and CVAIntermediatesuperdayBank credit riskDerivatives risk

   Say this

   Wrong-way risk is when your exposure to a counterparty grows at the same time as their credit deteriorates, so the two go bad together. It turns a manageable expected loss into a concentrated one, because the bad outcomes coincide by construction.

   Then walk it

   1. Specific wrong-way risk is a direct structural link. The textbook case: you buy protection on a company from a bank that is heavily exposed to that same company. When the reference entity deteriorates, your protection is worth more and your protection seller is weaker. That's the monoline insurer story in 2008 in one sentence.
   2. Another clean example: an oil producer sells you oil forward to hedge. Oil collapses, so your position with them is deeply in the money, and the same collapse is destroying their ability to pay. Energy banks lost money exactly this way in 2015 and 2020.
   3. General wrong-way risk is looser, driven by a common macro factor. Lending to emerging market banks in local currency while they've sold you dollars: a currency crisis hits your exposure and their solvency simultaneously.
   4. Also collateral correlation: taking a counterparty's own shares, or its home sovereign's bonds, as collateral. Exactly when you need to liquidate, the collateral is worth least. Basel bans own-issue collateral for this reason.
   5. How you handle it: model exposure and default jointly rather than multiplying independent expectations. Basel's standard workaround is an alpha multiplier, 1.4 by default, on the exposure input to cover correlation. That's crude and everyone knows it.
   6. The better controls are structural: don't take correlated collateral, set tighter limits on structurally linked counterparties, use break clauses, and stress the joint scenario explicitly rather than trusting the model.
   7. And the reason it matters more than its size suggests: wrong-way risk defeats diversification. You can't average it away across counterparties, because the correlation is the exposure.

   Where candidates lose it

   Giving a definition with no example. Interviewers want a named structure, and the monoline case or the oil producer case both work. The second thing they listen for is that standard CVA calculations assume independence between exposure and default, and that the Basel alpha multiplier is a crude patch for exactly this.

   Expect next

   • How does wrong-way risk affect your CVA number?
   • What collateral would you refuse to take, and why?
   • Is the Basel alpha of 1.4 adequate?
10. 040How do netting and collateral reduce counterparty exposure, and what's the difference between initial and variation margin?Counterparty risk and CVAIntermediatetechnicalBank credit riskClearing and margin

    Say this

    Netting lets you offset what you owe against what you're owed with the same counterparty, so exposure is one net figure rather than the sum of the positive trades. Collateral then covers most of that net figure. Variation margin covers today's mark-to-market; initial margin covers the move you'd suffer between their default and your close-out.

    Then walk it

    1. Close-out netting under an ISDA master with a valid netting opinion in the relevant jurisdiction is what makes it legally real. Without an enforceable opinion you have to hold gross exposure, and that's a country-by-country legal question, not a modelling one.
    2. The arithmetic is big. A portfolio of 100 trades, half positive and half negative, might have gross positive exposure of 800 crore and net exposure of 40 crore. Netting is the single most powerful mitigant there is.
    3. Variation margin: exchanged daily, equal to the change in net mark-to-market, so it keeps current exposure near zero. It's a transfer of value, and it eliminates exposure you've already suffered.
    4. Initial margin: held against future moves during the close-out period. It covers the gap between the last margin call and actually liquidating the portfolio, and it's sized off a high quantile, typically 99 percent over a 10-day margin period of risk for bilateral trades under the uncleared margin rules.
    5. So the residual risks after all that: gap risk if the market jumps between calls, margin period of risk being longer than assumed in a stressed close-out, disputes over valuation, collateral haircut adequacy, and wrong-way collateral correlation.
    6. Then the liquidity consequence, which candidates miss. Collateralisation converts credit risk into liquidity risk. You now have to fund margin calls in cash on the day, and a large adverse move means a large same-day cash outflow. That's what caused the UK gilt LDI crisis in 2022 and the 2021 nickel episode.
    7. And the Indian angle: the exchange-traded and cleared side is heavily margined under SEBI and the clearing corporations, while the bilateral OTC market is smaller and more collateral-light, so netting enforceability and CSA coverage vary a lot by counterparty type.

    Where candidates lose it

    Treating collateral as a free reduction in risk. It converts credit risk into funding liquidity risk, and the entities that blew up in 2022 were solvent and margin-called to death. Saying that out loud is what distinguishes a risk manager from someone quoting a mitigant list.

    Expect next

    • What is the margin period of risk and what would you assume for it?
    • What risk does collateralisation create?
    • What haircut would you apply to a corporate bond posted as collateral?

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.