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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank has USD 1,000 million of nondeposit funding: USD 600 million from overnight sources costing 3.0%, and USD 400 million from 1-year term funding costing 4.0%. Management proposes moving USD 200 million from overnight to 1-year term funding, with unchanged rates. What is the effect on annual interest cost and on rollover risk?

Annual cost rises by USD 2 million, from 34 to 36, because 200 million moves from a 3% to a 4% source. The overnight balance needing daily refinancing falls from 600 to 400 million, so rollover risk drops at the price of higher cost.

  1. ACost rises by USD 2 million; the overnight amount to be rolled daily falls to USD 400 millionCorrect
  2. BCost rises by USD 2 million; the overnight amount rises to USD 800 million
  3. CCost falls by USD 2 million; the overnight amount falls to USD 400 million
  4. DCost rises by USD 8 million; the overnight amount falls to USD 400 million

Explanation

Current cost = 600×3% + 400×4% = 18 + 16 = 34. New cost = 400×3% + 600×4% = 12 + 24 = 36. Cost rises by USD 2 million (equal to 200×1%). Overnight funding falls to USD 400 million, reducing daily rollover need. Option D wrongly uses the full 4% on the shifted amount.

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