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. 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.

2. 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?
3. 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?
4. 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?
5. 041Why does a central counterparty reduce risk, and what new risk does it create?Counterparty risk and CVAIntermediatetechnicalClearing and marginBank credit risk

   Say this

   A CCP replaces a web of bilateral exposures with a hub and spoke, so it multilaterally nets, standardises margin and mutualises losses. In exchange you've created a single point of failure and turned counterparty risk into liquidity risk for every member.

   Then walk it

   1. Multilateral netting is the big win. If A owes B, B owes C and C owes A, bilaterally there are three exposures; through a CCP there's almost nothing. G20 reform after 2008 pushed standardised OTC derivatives to clearing for exactly this reason.
   2. It also standardises: daily variation margin, initial margin on a model everyone can see, a default fund, and a documented waterfall. That removes the dispute and delay problem that made Lehman's unwinding so slow.
   3. The default waterfall in order: the defaulter's margin, the defaulter's default fund contribution, the CCP's own skin in the game, then the surviving members' default fund, then assessments or variation margin gains haircutting. Being able to recite that is what a clearing risk interviewer wants.
   4. New risk one, concentration. The CCP is systemically critical infrastructure. If it fails, everything fails, and it has no meaningful equity relative to the exposures it faces.
   5. New risk two, mutualisation. As a clearing member you are exposed to other members' defaults through the default fund. You've swapped a known bilateral counterparty for an unknown pool of them.
   6. New risk three, procyclical margin. Margin models raise requirements when volatility rises, so the CCP demands the most cash exactly when cash is scarcest. That's a liquidity amplifier, and it's what the 2020 and 2022 episodes were about.
   7. New risk four, the member-client link. If you clear for clients, you stand between them and the CCP, so you have to fund their margin calls intraday. The LME nickel episode in 2022 showed that a CCP can also change the rules under stress, which is a governance risk you can't model.
   8. So the honest summary: clearing has reduced credit risk and increased liquidity risk, and it has concentrated tail risk into a small number of institutions. Better on balance, not free.

   Where candidates lose it

   Listing the benefits and stopping at 'it's safer'. The interviewer wants the default waterfall and at least two created risks, with procyclical margin the most important. And you should say that clearing trades credit risk for liquidity risk rather than eliminating risk.

   Expect next

   • Walk me through the default waterfall.
   • How would you stress test your exposure to a CCP?
   • Is procyclical initial margin fixable?

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.