Financial Risk Management

Most asked Financial Risk Management Interview questions. If you are preparing for a role in Finance field, then you should checkout our Interview questions that can help you to lend a job.

Q.1 Does an organization articulate its risk appetite and risk tolerances for use in managing the business?
Primarily the risk appetite dialogue assists in bringing balance to the conversation around which risks the enterprise should take, types of risks it should avoid and the parameters within which it should operate going forward. The risk appetite statement is decomposed into risk tolerances to address the question.
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Q.2 State whether the Company’s Risk Reporting offer the management and the board required info required about the top risks and how they are managed?
The task of Risk reporting begins with relevant information about the critical enterprise risks and the way those risks are managed. Also it helps to analyse if there are opportunities to enhance the risk reporting process to make it more effective and efficient.
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Q.3 When are individual performance included in risk management?
When managing risk is considered extremely crucial aspect of the organization, then the individual performance plans of a large number of employees at different levels of the organization should include a specific objective or task linked to risk management. Therefore, performance against these features should be evaluated at regular intervals. As wisely said - "What gets measured gets managed, and what gets rewarded gets attention".
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Q.4 How is credit risk management assessment conducted?
Since there is a high demand for risk management experts in banking industry, hence there are huge chances that you will be asked this question. Clearly the hiring manager wants to judge your ability to conduct a basic analysis of a client’s financial position and credit risk. You are suggested to describe the basic steps of credit risk assessments of individuals or firms. Interviewers wish to test if you are skilled enough to carry out the procedures on your own and how well you understand the bigger picture.
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Q.5 Which metric should be used to analyse a company’s stock?
In this case the interviewer wants to analyse your risk assessment skills. Your reply must infer that you have a well-defined strategy to measure stock’s performance and present findings using illustrations and reasoning. As a finance professional, we are expected to evaluate risk and reward of financial investment opportunities.
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Q.6 What is the primary concern of risk management?
The primary concern of risk management is to reduce earnings volatility
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Q.7 What is also called as net worth statement?
Balance Sheet is also known as net worth statement
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Q.8 What is the purpose of the leverage ratio?
A leverage ratio is any one of several financial measurements that assesses the ability of a company to meet its financial obligations. Some of the common leverage ratios include the debt-equity ratio, equity multiplier, degree of financial leverage, and consumer leverage ratio.
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Q.9 What is the first step of risk management process?

Identification is the first step in risk management process


The steps of financial risk management process are -

  • Identify the risk.
  • Analyze the risk.
  • Prioritize the risk.
  • Treat the risk.
  • Monitor the risk.
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Q.10 Which financial products may have exposure to LIBOR?
LIBOR is linked to a wide range of financial products, including -

  • Floating-rate notes and bonds, including corporate bonds
  • Adjustable-rate mortgage-backed securities (e.g., ARMs, CMOs, CAS, STACR, CRT)
  • Structured products
  • Margin loans
  • Securities-based lines of credit/SPA loans
  • Syndicated loans, small business loans, commercial real estate loans, other bank loans, or floating-rate loans
  • Adjustable-rate mortgages
  • Derivatives, including interest rate swaps
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Q.11 What does positive alpha values results in?
Positive alpha values results in assured profits
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Q.12 Define Financial risk.
Financial risk is the probability of dissipating money on a purchase or business enterprise. Some more general and different financial risks involve liquidity risk, credit risk, and operational risk. It is a sort of danger that can occur in the failure of capital to interested parties.
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Q.13 Tell us the main causes of risk.
The 5 fundamental sources of risk are Marketing, Production, Legal, Financial, and Human.
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Q.14 What is a financial risk for a business?
Financial risk pertains to a company's capacity to maintain its debt and financial support, while business risk leads to the company's strength to make sufficient revenue to meet its operational expenses.
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Q.15 What creates financial risk?
Financial risk usually occurs due to changes and declines in the financial market generated by movements in stock prices, interest rates, currencies, and more.
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Q.16 Explain the five steps in the risk management process.

Step 1: Recognize the Risk.

Step 2: Investigate the Risk.

Step 3: Evaluate or Order the Risk.

Step 4: Treat the Risk.

Step 5: Observe and Review the Risk.

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Q.17 Tell us the 4 ways to manage risk.

The primary processes for risk management are

  • Avoidance (eliminate, withdraw from or not become involved)
  • Reduction (optimize – mitigate)
  • Sharing (transfer – outsource or insure)
  • Retention (accept and budget)
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Q.18 What is Exposure at Default (EAD)?
Exposure at default or (EAD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution. It can be defined as the gross exposure under a facility upon default of an obligor.
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Q.19 What are the principal types of risk management?
Inflation Risk. Longevity Risk. Interest Rate Risk. Liquidity Risk. Market Risk. The sequence of Returns Risk. Opportunity Risk. Tax Risk.
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Q.20 What are the causes of valuation risk?

Valuation risk is the risk in which an entity suffers a loss when trading an asset or a liability due to a difference between the accounting value and the price effectively obtained in the trade. The valuation risk is primarily important for financial instruments with complex features and limited liquidity, that are valued using internally developed pricing models.

Some of the prominent reasons for Valuation errors can be -

  • Missing consideration of risk factors
  • Inaccurate modelling of risk factors
  • Inaccurate modelling of the sensitivity of instrument prices to risk factors. 
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Q.21 What is the distinction between credit risk and counterparty risk?
Credit risk is the prospect of operating a risky bond. Counterparty risk is the danger that the counterparty will not be capable to satisfy its contractual commitments if the credit event occurs.
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Q.22 How do you recognize financial risks?
To recognize financial risk, analyze the daily financial transactions, particularly cash flow. Operational risks are connected to the company's executive and operational methods ranging from the IT systems to regulations to recruitment.
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Q.23 Is counterparty a risk credit risk?
Counterparty risk is a type or we can say sub-class of credit risk and it is the risk of default by the counterparty in various forms of derivative contracts. It is the credit risk that Bank A will default on this commitment to Bank C (for example, Bank A might go insolvent).
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Q.24 What are the 3 ways to risk management?

Each process is divided into one of the three general categories that we practice to incorporate risk management practices which are

  • operational hedging
  • access to external finance
  • financial hedging with derivatives.
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Q.25 Explain the sources of finance.
Causes of finance for the business are debt, equity, working capital loans, retained earnings, euro issue, debentures, term loans, letter of credit, venture funding, etc.
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Q.26 What are the elements of risk management?

There is a minimum of 5 crucial elements that should be regarded when making a risk management structure. They involve

  • risk measurement
  • risk identification; and assessment
  • risk reporting and monitoring
  • risk mitigation
  • risk governance
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Q.27 How can we bypass financial risk?
  • Invest carefully.
  • Read about diversification.
  • Put money in the savings account.
  • Get a trusted management accountant.
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Q.28 Define counterparty limit.
Counterparty limits limit the risk exposure to a special counterparty. They are set so as to decrease the loss that could arise if the counterparty were to default on its responsibilities.
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Q.29 Explain Market risk.
Market risk is the probability that a person or other entity will encounter losses due to circumstances that affect the whole appearance of investments in the financial markets.
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Q.30 Which is the most affordable source of finance?
Debentures are the most affordable source of finance. As it can quickly be converted into shares is of the lower rate and fixed interest is presented irrespective of profit. Debt is the cheapest source of finance as correlated to equity.
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Q.31 How often does the organization restore its assessment of the top risks?
The enterprise-wide risk evaluation method should be sensitive to shift in the business environment. A robust method for recognizing and prioritizing the crucial enterprise risks, including developing risks, is necessary to an evergreen view of the top risks.
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Q.32 How is PFE anticipated?
PFE is a division of counterparty risk/credit risk. It is estimated by measuring surviving trades done against the reasonable market prices in the future during the existence of transactions. It can be called the sensitivity of risk with respect to market prices.
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Q.33 Who holds the top risks and is responsible for results, and to whom do they report?
Once the key risks are targeted, some person or some group, function, or unit must keep them. Gaps and overlaps in risk ownership must be reduced, if not discharged.
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Q.34 Explain counterparty credit exposure.
Counterparty credit exposure is a ratio of the amount that would be missed in the situation that a counterparty to a financial contract defaults. Only contracts that are secretly negotiated among counterparties, i.e. over-the-counter (OTC) derivatives, are subjected to counterparty credit risk.
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Q.35 How powerful is the company in maintaining its top risks?
A robust method for accomplishing and observing each of the crucial enterprise risks is necessary for successful risk management, and risk management abilities must be increased continuously as the speed and complexity of business transformation.
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Q.36 What is the most reliable measure of risk?
The 5 measures incorporate alpha, R-squared, beta, standard deviation, and Sharpe ratio. Risk stratagems can be utilized individually or collectively to produce a risk assessment. When analyzing 2 potential investments, it is smart to contrast like for like to decide which investment endures the most risk.
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Q.37 Tell us the types of market risk.
The various types of market risks involve commodity risk, interest rate risk, country risk, currency risk.
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Q.38 What do you understand by asset/liability management?
Asset/liability management is the method of maintaining the effectiveness of assets and cash flows to overcome the firm's risk of loss from not giving a liability on time.
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Q.39 Do individual performance plans involve risk management?
If managing risk is important to the foundation, the individual performance plans of a generous number of employees at various levels of the organization should incorporate a specific purpose or task associated with risk management.
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Q.40 Is standard deviation a useful measure of risk?
Standard deviation supports to determine the spread of asset prices from their average price. While standard deviation is an extraordinary measure of investment risk, it is not the only one. There are several other measures investors can practice to determine whether an asset is extremely risky for them or not risky enough.
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Q.41 How is portfolio risk estimated?
The risk of a portfolio is estimated using the conventional deviation of the portfolio. Nevertheless, the standard deviation of the collection will not be solely the weighted average of the standard deviation of the two assets.
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Q.42 What is the ALM method in banks?
(ALM) Asset and liability management is a method employed by financial institutions to alleviate financial risks emerging from a mismatch of liabilities and assets. ALM approaches employ a sequence of risk management.
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Q.43 What causes operational risk?
(OR) Operational risk is the risk of loss because of breaches, errors, interruptions, or damages either intentional or accidental which is caused by internal processes, people, systems, or external events.
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Q.44 Why is variance an inadequate measure of risk?
Variance is neither great nor bad for investors in and of itself. It is a measurement of the extent of risk in an investment. Risk considers the chance that an investment's return, or its gain or loss over a particular period, is higher or lower than expected.
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Q.45 Why is ALM necessary for banks?
ALM is a complete and dynamic structure for measuring, observing, and accomplishing the market risk of a bank. The ALM purposes extend to liquidly risk management, trading risk management, administration of market risk, funding and capital planning, and profit planning and growth projection.
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Q.46 Define single counterparty exposure limit.
The (SCEL) single counterparty exposure limit is a non-risk adjusted back-stop means to guarantee that vulnerabilities to a single counterparty or a group of combined counterparties are within a careful limit at all times.
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Q.47 What is replacement cost risk?
The risk of loss of unrealized earnings on complex transactions with a counterparty. The resulting appearance is the cost of substituting the original transaction at current market prices.
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Q.48 What is interest rate risk and how do bankers manage it?
There are 2 ways in which a bank can accomplish its interest rate risks: (a) by balancing the maturity and re-pricing terms of its assets and liabilities and (b) by employing in derivatives transactions.
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Q.49 Who controls NBFC?
The Reserve Bank has been granted the authority under the RBI Act 1934 to register, lay down policy, inspect, issue directions, regulate, control, and exercise surveillance over NBFCs that match the 50-50 models of principal business.
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Q.50 How do you resolve operational risk?

Step 1: Managing Equipment Malfunctions.

Step 2: Keep Safe Business to Business Relationships.

Step 3: Having Enough Insurance.

Step 4: Know the Regulations.

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Q.51 What are the operational risks in banking?
Operational risk has been established by the Basel Committee on Banking Supervision1 as the opportunity of loss occurring from incompetent or failed internal methods, people, and systems or from outside events. This definition includes legal risk but dismisses strategic and reputational risk.
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Q.52 What is the tolerable risk?
A level of risk is deemed adequate by society in order that some appropriate benefit or functionality can be achieved, but in the theory that the risk has been assessed and is being maintained.
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Q.53 What triggers market risk?
Sources of market risk involve political turmoil, recessions, natural disasters, changes in interest rates, and terrorist attacks. Systematic, or market risk, tends to change the whole market at the same time.
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Q.54 What is a bull put spread?
A bull put spread is an options approach that is practiced when the investor requires a steady rise in the value of the underlying asset.
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Q.55 What is Theta neutral strategy?
Market-neutral policies receive a profit when time moves and the "magic" of time decay (Theta) does its job. The wonderful characteristic of these versatile option policies is that they can be practiced by the bullish or bearish investor as well as by the market-neutral trader.
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Q.56 How do you create a bull spread?
A bull put spread is created by trading higher striking in-the-money put options and purchasing the same number of lower outstanding out-of-the-money put options on the identical underlying safety with the same expiration date.
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Q.57 Why do we require a regulatory framework?
A regulatory framework for the arrangement of financial statements is essential to guarantee that the obligations of the users of financial announcements are met with at least a primary minimum of information. Also, to enhance users' determination in the financial reporting method.
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Q.58 What does the Basel Committee do?
The (BCBS) Basel Committee on Banking Supervision is the original global standard-setter for the prudential supervision of banks and gives a forum for legitimate agreement on banking supervisory concerns. Its 45 members involve central banks and bank executives from 28 jurisdictions.
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Q.59 What are the 3 pillars of Basel 2?
The Basel II framework works under 3 pillars: Capital adequacy requirements. Supervisory review. Market discipline.
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Q.60 What is an advanced internal ratings-based method?
An (AIRB) advanced internal rating-based access to credit risk analysis is an arrangement that demands that all risk elements be calculated within a financial institution. (AIRB) Advanced internal rating-based can accommodate an institution to reduce its capital conditions and credit risk.
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Q.61 What is the center of Pillar 3 of Basel II?
The purpose of Pillar 3 is to provide market discipline to work by requiring institutions to reveal details on the field of application, risk exposures, capital, risk assessment methods, and the capital sufficiency of the institution.
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