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What's the difference between a strap and a strip option combination?
Strap = 2C+1P (bullish vol bias); Strip = 1C+2P (bearish vol bias)...
What is a straddle and when would you use it?
Long straddle = long call + long put at same strike, profits from large moves either way...
What's the difference between cash-settled and physically-settled futures?
Cash settlement credits/debits the difference in cash at expiry; physical settlement requires actual delivery of the underlying. Indices use cash; commodities typically use physical.
How do delivery months and expiry work for futures?
Each listed contract references a delivery month. The contract stops trading on an exchange-specified last trading day, and delivery occurs during a multi-day delivery window.
How do rating agencies measure rating migration over time?
A rating transition matrix is a square table showing the probability that an issuer at rating X today will be at rating Y one year later. Rows sum to 100%...
What is vega and which options have the biggest vega exposure?
Vega = S·√T·φ(d1) and is largest for long-dated ATM options. A 2-year $100 ATM call has vega ~5x a 1-month version on the same name.
Explain extension risk — why does my MBS get worse when rates rise?
Extension risk is the lengthening of MBS life when rates rise and borrowers stop prepaying. Investors are stuck with below-market coupons longer, amplifying duration losses.
How do I price a barrier option using Monte Carlo simulation?
Barrier options pay only if the underlying hits or avoids a trigger during life. For a down-and-out call, simulate thousands of paths...
How does the implied vol surface move over time?
The surface doesn't move rigidly. Sticky strike keeps sigma(K,T) fixed; sticky delta keeps vol for a given moneyness fixed; sticky local vol follows Dupire's equation.
How is logistic regression used for default prediction and how do I interpret coefficients?
Logistic regression models log-odds of default linearly. exp(beta) gives odds multiplier per unit of predictor. PD recovered via the sigmoid.
What is the end-to-end scorecard development process for credit risk?
Eight steps: sampling, data prep, binning, attribute selection, logistic regression, points scaling, validation, deployment and monitoring with PSI.
How do you assess risk culture in an organization — isn't it too intangible?
Risk culture is measurable via surveys, behavioral KRIs, committee dynamics, and compensation alignment — it's a leading indicator of future risk events.
How do you identify and exploit option bound violations?
Violations exploited by buying undervalued options + hedge, or selling overvalued options + hedge...
What are the upper bounds on call and put prices?
Call upper bound: c <= S. European put: p <= K*e^(-rT). American put: P <= K...
What is IRRBB and how do regulators measure it?
Interest rate risk in the banking book (IRRBB) measures the sensitivity of a bank's non-trading balance sheet to interest rate movements.
How do contract size and notional value relate in futures?
Contract size is the exchange-defined quantity of the underlying per contract. Notional value is contract size times current price — the economic exposure you carry.
What are the key specifications I need to know for a futures contract?
Futures contract specifications are the standardized terms the exchange defines so every contract is fungible. Six elements matter most: underlying asset, contract size, delivery month, price quotation, tick size, and delivery terms.
What is Fitch's approach to corporate ratings and how is it different from Moody's/S&P?
Fitch publishes 'Navigator' rating reports for each issuer — a one-page visual scorecard showing how key factors map to the rating. The framework uses four pillars similar to S&P: Sector Risk Profile, Operating Environment, Company Profile, and Financial Profile...
What is contraction risk and why does it hurt MBS investors when rates drop?
Contraction risk is accelerated principal return when rates fall and borrowers refinance. Reinvestment at lower yields caps the MBS's upside, creating negative convexity.
Why do interest rate models use trinomial trees instead of binomial?
Trinomial trees add a third branch at each node, giving more flexibility for matching mean-reverting dynamics common in interest rates...
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