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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

A bank has a retail deposit portfolio of 1,000 million with contractual overnight maturity. Behavioural analysis shows 40% is stable core balances with an effective life of 5 years, and 60% is volatile with an effective life of 1 month. The 5-year transfer rate is 4.50% and the 1-month rate is 2.50%. Using the behavioural split, what is the blended transfer credit rate paid to the deposit-gathering unit?

The blended credit rate is 3.30%. The stable 40% earns the 5-year rate of 4.50%, contributing 1.80%, and the volatile 60% earns the 1-month rate of 2.50%, contributing 1.50%. Behavioural tenors, not contractual overnight maturity, drive the credit, so the sum is 3.30%.

  1. A2.50%
  2. B3.30%Correct
  3. C3.50%
  4. D4.50%

Explanation

Weight each tranche by its share: 0.40 × 4.50% = 1.80%, and 0.60 × 2.50% = 1.50%. The sum is 3.30%. Checking: 2.50% + 0.40 × (4.50% − 2.50%) = 3.30%. Using the contractual overnight rate gives 2.50%, which ignores stability.

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