Skip to content

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

A bank holds a liquidity reserve of USD 400 million in government securities. Its treasury policy applies a 5% haircut to these securities in a repo-based stress scenario. The bank also expects net stressed cash outflows of USD 350 million over 30 days. What is the surplus or shortfall of the reserve relative to the outflows, assuming the reserve is liquidated only through haircut-adjusted value?

The reserve is worth USD 380 million after the 5% haircut (400 x 0.95), so against USD 350 million of stressed outflows there is a surplus of USD 30 million. Using the unadjusted USD 400 million would wrongly show a USD 50 million surplus.

  1. ASurplus of USD 30 millionCorrect
  2. BSurplus of USD 50 million
  3. CShortfall of USD 10 million
  4. DSurplus of USD 20 million

Explanation

Haircut-adjusted value = 400 x (1 - 0.05) = 380. Surplus = 380 - 350 = 30 million. Ignoring the haircut gives 50, which overstates the available liquidity.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity and Reserves Management: Strategies and Policies shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity and Reserves Management: Strategies and PoliciesFree diagnostic mock

More Liquidity and Reserves Management: Strategies and Policies questions