Sample interview questions: How do you assess and manage the company’s exposure to interest rate risk?
Sample answer:
Assessing Interest Rate Risk Exposure:
- Identify interest rate-sensitive assets and liabilities: Determine which cash flows, investments, and debts are variable with interest rate changes.
- Use scenario analysis: Conduct simulations to assess potential impact of interest rate fluctuations on key financial metrics, including earnings, cash flows, and net worth.
- Monitor market trends: Stay abreast of economic and regulatory developments that may influence interest rate movements.
- Consider historical data: Analyze historical interest rate patterns to identify potential risk areas.
- Engage with external experts: Consult with financial advisors, economists, or risk management professionals for insights and support.
Managing Interest Rate Risk:
Hedging Strategies:
- Interest rate swaps: Exchange fixed-rate payments for floating-rate payments to lock in favorable interest rates.
- Forward rate agreements (FRAs): Contract to receive or pay a fixed interest rate in the future, protecting against anticipated rate changes.
- Caps and floors: Limit maximum and minimum interest rates payable or receivable.
Asset and Liability Management:
- Match maturities: Structure assets and liabilities to minimize duration mismatches, red… Read full answer