Sample interview questions: How do you assess and manage interest rate risk in financial analysis?
Sample answer:
Assessing Interest Rate Risk:
- Duration Analysis: Quantifies the sensitivity of a portfolio’s value to changes in interest rates. Higher duration indicates greater sensitivity.
- Sensitivity Analysis: Simulates the impact of interest rate changes on portfolio cash flows and market value.
- Stress Testing: Examines extreme interest rate scenarios to evaluate potential losses and identify vulnerabilities.
Managing Interest Rate Risk:
- Diversification: Holding assets with different durations and interest rate sensitivities to mitigate risk.
- Hedging: Using derivatives (e.g., interest rate swaps, futures) to offset the impact of interest rate changes.
- Liability Matching: Aligning the maturities of assets and liabilities to reduce interest rate mismatches.
- Active Duration Management: Adjusting the portfolio’s duration based on interest rate forecasts.
- Cash Flow Forecasting: Read full answer