Hi,
I have recently attended an interview for a "Junior Trader" position in a Tier I IB in Ldn. It was an unusual structure as I was asked only 1 question and the rest developed from there. But, in case there are rates traders around here, how would you answer it?
You are looking at your risk positions across the entire curve (say 1y to 50y), large risk is scattered erratically across different tenors, if your boss asks you what is your position, what do you say? (Hint: sum of all is incorrect)
Essentially I needed to describe how would I look at risk overall, given different tenor's rate would move differently.
Give him the market value and duration to start.
You mean different bucket risk?
What's the total delta? depending on currency i'd ignore the front tenors. What's your 10s30s risk? What's your 5s10s risk? What's your 2s5s risk? What's your 5s7s10s risk? What's the 10s15s30s risk?
You can also propose doing a PCA on the risk to reduce it. https://www.amazon.co.uk/Pricing-Trading-Interest-Rate-Derivatives/dp/0… has a good chapter on condensing risk.
That seems terribly difficult if you have no experience. There’s about a half dozen risks you have in there.
1st order, i would do a linear interpolation of DV01 into the major liquid points (in the US, that would be 2yr-5yr-7yr-10yr-20yr-30yr).
Assuming you want to hedge the portfolio immediately, and didn't have the time to think thru the ideal hedge, i'd look at the biggest risk points first and hedge those to minimize the bucket risks.
Without knowing the actual portfolio details, there are all sorts of risks that could be in a large book. There might be a huge 2/30 curve trade (or whatever) that only shows up after you summarize the book into these kindof terms.
After doing a linear interpolation and minimizing the bucket risk that way...then i would do a PCA on the portfolio to find the other tail risks that might not be obvious.
Yes, another way to say it.
He later mentioned ignoring front, but then again I said that this is the case with euro, but you cannot necessarily do that to gbp as if it's a no-deal brexit front contracts will move, and frankly usd too with FED not too worried about inverted curve.
I mentioned steepeners and flateners, but the guy righlty said that if say you have massive 3Y and 11Y, 2s10s won't necessarily tell you much. But that's a good way to look at it I imagine.
The link is broken, I'd be interested to read, could you post again pls
I have 3yr experience, but I agree, I never looked at it in this way. You sort of have an idea for yourself, rather than have some smart way of doing it. I'd normally just narrow down the buckets until I get smaller range which makes sense.
Sounds reasonable, but again what if your risk is in 3,4,5,8,9,11,12... buckets only?
If you start hedging out each bucket you'll move the market (positions are quite massive) and lose money.
Any good sources to read about PCA pls? Sounds like something I missed.
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