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Analytical interview question about Credit Risk Management for Senior-Level Sales and Trading

What strategies would you use to manage credit risk in fixed-income trading?

Sales and Trading

Analytical

Asked at

Wells Fargo

Difficulty :

Hard

Explanation

This question evaluates your understanding of credit risk and risk management strategies specific to fixed-income trading. Recruiters want to see your ability to assess counterparty risk, identify warning signs, and implement mitigation measures. Common pitfalls include ignoring the role of credit ratings or failing to address diversification. A strong response demonstrates a structured risk assessment approach and the use of tools like credit default swaps (CDS) or diversification strategies. Preparation involves studying credit risk management techniques and examples from fixed-income markets.

Answer Example

I would begin by analyzing the creditworthiness of issuers using ratings, financial statements, and market indicators like CDS spreads. To mitigate risk, I’d recommend diversifying across issuers, sectors, and maturities. Additionally, I’d use CDS to hedge exposure to high-risk issuers. For example, during a downturn in the energy sector, I adjusted a client’s fixed-income portfolio by reducing exposure to high-yield bonds and increasing allocation to investment-grade securities, reducing risk by 25%.

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