Market Risk Interview Questions: Top 5 Areas You Need to Prepare For Now
Market risk interview questions can be quite challenging to prepare for because the field is pretty technical, broad, and complex. Nonetheless, there are key concepts and questions that often come up in interviews.
While listing all the possible interview questions is not feasible, we may group them into key focus areas and list down some key questions for each area. The top 5 key areas are market risk measurement & management, derivatives & pricing models, Basel & financial regulations, programming & data management, and financial markets & economics.
Let’s explore them further alongside an analogy to help you build intuition.
Analogy: imagine you are visiting the doctor for a health check-up…
1) Market Risk Measurement & Management
Market risk measurement & management relates to knowledge and concepts of how to measure and manage market risk. Intuitively, this is about how you describe the amount of risk present, and how you intend to manage it. It will almost certainly show up in market risk interview questions.
Analogy: How does your doctor know that you’re in good health? He could take your blood pressure (the “risk measure”) and see how high it is. And if your blood pressure is high/you are in poor health, what does he plan to do to help improve your condition? He might advise you to exercise more! (the “risk management”)
Some market risk interview questions
– What is Value at Risk (VaR) and Expected Shortfall (ES)?
– What is the difference between VaR and ES? Is VaR or ES better?
– How do you monitor the performance of VaR/ES?
– What does it mean if a risk measure is coherent?
– What are the Greeks? What are Delta and Vega?
– What is Gamma? Why is it important?
– What is hedging and how do you do it? What are some challenges in hedging?
– What is the purpose of stress testing and what are some common stress scenarios used in practice?
2) Derivatives & Pricing Models
Derivatives & Pricing Models relate to knowledge and concepts of financial derivatives (a type of financial instrument) and the pricing models used to calculate their value. Intuitively, this is really about understanding the common products traded by a trading desk and how their value is influenced by market rates/prices.
Analogy: To give you a health check-up, your doctor must know the available medical instruments and their purposes, and what conditions affect their effectiveness. For example, to check your blood pressure, he needs to know how to operate a blood pressure monitor (the “product”). He also needs to know how the measuring mechanism works (the “pricing model”) to ensure the suitability of use for the patient.
Some market risk interview questions
– What are derivatives? What are the main classes of derivatives?
– What is a future? How does it work?
– What is a swap? How does it work?
– What is an option? How does it work?
– What is the difference between an exchange-traded and OTC derivative?
– What are some common option strategies? What are their advantages and disadvantages?
– What is the Black-Scholes model? What is it used for? How is it derived?
– What is the risk-neutral valuation and no-arbitrage in derivative pricing?
3) Basel & Financial Regulations
Basel & Financial Regulations relate to knowledge about global regulatory frameworks and requirements, especially those prescribed by the Basel Committee of Banking Supervision (BCBS) and the International Swaps & Derivatives Association (ISDA). Intuitively, this is about awareness and understanding of regulatory requirements that financial institutions need to comply with.
Analogy: To practice medicine and formally treat you, your doctor must register with the local medical board/registry and have a license to practice. For example, doctors in Singapore must register with the Singapore Medical Council. What are the requirements to obtain the license and how is the licensing framework structured? What rules, conduct, and standards (the “regulatory requirements”) must he/she comply with?
Some market risk interview questions
– What is the Basel 3 framework? What does it intend to do?
– What are the 3 Lines of Defense?
– What are the three pillars of Basel 3?
– What is the Fundamental Review of the Trading Book (FRTB)? Why is it important?
– What are the different approaches under FRTB and their differences?
– What is the difference between the trading and banking book?
– What are some current trends and developments in market risk management and financial regulation?
4) Programming & Data Management
Programming & Data management refers to knowledge and skills about programming, data, and how to manage large datasets and automate workflows. This is important because market risk management inherently involves a lot of data (limits, exposures, market data, etc.) and reporting. Since these are important skills on the job, you’ll likely encounter this in market risk interview questions too.
Analogy: When you undergo a full health check-up, there is a whole suite of numerical indicators that are measured and computed. For example, your height and weight, BMI, cholesterol levels, blood sugar levels, blood pressure levels, and so forth. There are also ranges that may be considered healthy. How is your doctor going to measure all these indicators in an efficient manner? Where is your doctor going to store all this data?
Some market risk interview questions
– What programming languages do you know and what experience do you have in them?
– What do you know about Excel pivot tables? How do you use them?
– What is SQL and what is it used for?
– How do left/right/inner/outer joints work for data tables?
– What are some of the key concepts in OOP, such as classes, objects, inheritance, and polymorphism?
– How do you use OOP to create more efficient and modular code?
5) Financial Markets & Economics
Financial markets and economics knowledge is important because it relates to the “market” in market risk management. Interest rates, FX rates, bond prices, equity prices, and commodity prices are all market variables that affect the value of portfolios. To manage market risk effectively, one should understand how the macroeconomic environment affects financial markets, which helps to understand where the market (and your P&L) is heading.
Analogy: To treat you effectively, the doctor must understand the macro environment when it comes to diseases and medical conditions. For example, an ongoing COVID-19 pandemic might suggest that your condition is possibly COVID rather than a normal cold/flu. Understanding the nature of the COVID-19 condition and the underlying virus, SARS-Cov-2, will help to optimize the treatment plan.
Some market risk interview questions
– What are the main factors that determine economic growth in a country?
– What is the role of central banks in regulating the economy?
– How do exchange rates impact international trade and investment?
– What are the key differences between monetary and fiscal policy?
– What are the effects of inflation on the economy, and how can it be controlled?
– How does globalization impact the behavior of financial markets?
– How do government policies impact the financial markets and the economy as a whole?
– How do market bubbles occur and what are their potential consequences?
The market risk field is quite broad and the above are certainly not exhaustive. But, they would be a good starting point to prepare for your next market risk interview. Also, see more specific interview questions from EFC.
Have fun preparing!
Risk Manager by Profession, Mentor and Coach by Passion.
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