FRM Part II · FRM Exam Part II · Contingency Funding Planning
A bank holds 200 million of government bonds, of which 60 million are pledged as collateral for existing repos. The remainder is unencumbered. Stress haircut on the bonds is 5%. How much liquidity can the bank count from these bonds in its CFP buffer?
The bank can count 133 million. Pledged bonds of 60 million are encumbered and excluded, leaving 140 million, which after a 5% stress haircut yields 133 million. Ignoring either encumbrance or the haircut overstates the buffer.
- A190.0 million
- B133.0 millionCorrect
- C140.0 million
- D200.0 million
Explanation
Only unencumbered assets count: 200 - 60 = 140 million. After a 5% haircut: 140 x 0.95 = 133 million. Option 140 ignores the haircut; 190 haircuts everything but ignores encumbrance; 200 ignores both.
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