How to answer this Technical interview question about Interest Rate Risks for Senior-Level Sales and Trading?

Explain how you would analyze the impact of an unexpected interest rate hike on your trading portfolio.

Sales and Trading

Technical

Asked at

Goldman Sachs

Difficulty :

Hard

Explanation

This question evaluates your ability to assess macroeconomic events and their implications on trading strategies. Recruiters are looking for your understanding of interest rate sensitivity, portfolio risk exposure, and mitigation techniques. Common pitfalls include failing to consider both direct and indirect impacts or not providing actionable insights. A strong response includes a structured approach to identifying affected instruments, quantifying risks, and adjusting strategies. Preparation involves reviewing case studies of interest rate impacts and understanding portfolio management techniques.

Answer Example

I would first assess which instruments in the portfolio are most sensitive to interest rate changes, such as bonds and interest rate derivatives. Using duration and convexity analysis, I would quantify the potential losses. Additionally, I would analyze secondary impacts on equities, currencies, and commodities. To mitigate risk, I would consider hedging with interest rate swaps or adjusting allocations towards less sensitive assets. For example, during a simulated interest rate hike scenario, I successfully reduced portfolio exposure by 20% using a combination of hedging and diversification strategies.

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