CareEdge Ratings Credit Analyst Interview Questions and Answers

Q1. Options payoff for Long call and short put
Ans. 
Long call and short put have similar payoff structures.
• Both strategies have unlimited profit potential and limited loss potential.

• Long call profits when the underlying asset price rises above the strike price.

• Short put profits when the underlying asset price stays above the strike price.

• Both strategies have a breakeven point at the strike price plus the premium paid/received.

• Long call and short put can be used separate
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Q2. Interest rate risk for Zero coupon bond vs coupon bond
Ans. 
Zero coupon bonds have higher interest rate risk than coupon bonds.
• Zero coupon bonds have no coupon payments, so their prices are more sensitive to changes in interest rates.

• Coupon bonds have regular coupon payments, which can offset some of the price changes due to interest rate fluctuations.

• As interest rates rise, the price of zero coupon bonds falls more than the price of coupon bonds.

• As interest rates fall, the pri...read more
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Q1. Valuation of credit default swap
Ans. 
Valuation of credit default swap
• Valuation of credit default swap involves estimating the probability of default and the expected loss in case of default

• The valuation also takes into account the credit spread and the recovery rate

• Various models such as structural models, reduced-form models, and Monte Carlo simulations are used for valuation

• Market data such as credit spreads, interest rates, and volatility are also used
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Q2. Value at risk methods and uses
Ans. 
Value at risk (VaR) is a statistical measure used to quantify the level of financial risk within a portfolio.
• VaR estimates the maximum potential loss that an investment portfolio may suffer within a given time frame and confidence level.

• It is used by financial institutions to manage risk and set capital requirements.

• VaR can be calculated using various methods such as historical simulation, Monte Carlo simulation, and p...read more
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Assume you are consultant to an asset owner client. How will you consult the client for valuing the portfolio and risk.