Sample interview questions: How do you assess and manage risks associated with changes in funding costs?
Sample answer:
Assessing Risks Associated with Changes in Funding Costs
- Historical Analysis: Examine past funding costs and market conditions to identify trends and patterns that may indicate potential risks.
- Scenario Analysis: Develop hypothetical scenarios that depict changes in funding costs under various market conditions, such as interest rate fluctuations, credit downgrades, or economic downturns.
- Sensitivity Analysis: Quantify the impact of different funding cost scenarios on key financial metrics, such as net interest margin, earnings per share, and debt service coverage ratio.
Managing Risks Associated with Changes in Funding Costs
Diversification:
- Obtain funding from multiple sources (e.g., banks, bond markets, insurance companies) with varying interest rate sensitivities and maturities.
Hedging Instruments:
- Consider using interest rate swaps, caps, or floors to lock in funding costs at favorable levels.
Prepayment Options:
- Negotiate prepayment clauses in loan agreements to provide flexibility in adj… Read full answer
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