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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank computes its survival horizon under a stress scenario as 30 days using a buffer of USD 600 million, with a constant stressed net outflow of USD 20 million per day. Management then discovers that USD 120 million of the buffer is encumbered as collateral for a derivatives margin call that is already triggered and is not captured in the outflows. Holding all else constant, what is the corrected survival horizon?

The corrected survival horizon is 24 days. Encumbered collateral of USD 120 million cannot be used to meet outflows, so the usable buffer falls to USD 480 million, and dividing by USD 20 million of daily stressed outflow gives 24 days rather than 30.

  1. A24 daysCorrect
  2. B30 days
  3. C27 days
  4. D20 days

Explanation

Unencumbered buffer = 600 - 120 = 480 million. Dividing by 20 million per day gives 24 days. Leaving the buffer unchanged gives 30 days, which ignores encumbrance. Subtracting 120 from outflows instead is a base error.

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