Sales & Trading Interview Practice Test

In a rising rate environment, the central idea is to manage interest-rate risk by controlling how much the portfolio’s value moves with changes in yields. Duration measures price sensitivity to rate changes—the higher the duration, the bigger the drop when rates rise. So prudent risk management is to reduce duration to lower that sensitivity, which helps protect the portfolio from immediate mark-to-market losses as rates climb.

Beyond duration, convexity matters because it describes how that sensitivity itself changes as yields move. Adjusting convexity exposure through hedges or rebalancing lets you fine-tune how the portfolio responds to larger rate moves and to changes in the rate environment over time. Depending on views and constraints, you might tilt toward shorter-duration assets or toward positions with higher convexity to better withstand rate shocks while maintaining potential upside.

Why the other options are less appropriate: increasing duration would increase price risk when rates rise; leaving duration unchanged while only tweaking credit risk ignores the primary lever for rate sensitivity; exiting all fixed income is overly drastic and misses the opportunity to manage risk systematically through duration and convexity.