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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank gathers deposits in two currencies and funds assets in both. It finds that most of its foreign currency funding comes from FX swap markets with short tenors. Which risk is most directly heightened by this funding mix?

Rollover and market-access risk is most heightened, since short-tenor FX swap funding must be renewed often and swap markets can become impaired in stress. The bank could then be unable to replace foreign currency funding at reasonable cost or at all.

  1. ACredit risk on the bank's loan book
  2. BRollover and market-access risk if FX swap markets become disruptedCorrect
  3. COperational risk from deposit processing
  4. DEquity price risk on its trading book

Explanation

Short-tenor FX swap funding must be renewed frequently, and swap markets can seize up in stress, as seen in dollar shortages. This makes rollover and access risk the main concern; the other risks are not directly raised by this funding mix.

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