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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank holds USD 400 million of government bonds in its liquidity buffer. USD 100 million of these are pledged as collateral against an existing repo that matures after the stress horizon. The remaining bonds can be repoed at a 4% haircut or sold at a 2% discount to market value. For a 30-day stress, the CFP assumes the bank uses the approach that yields the larger cash amount from the unencumbered bonds. What cash does the CFP count?

Only the USD 300 million of unencumbered bonds count. Selling them at a 2% discount gives USD 294 million, more than the USD 288 million from repo at a 4% haircut. So the CFP counts USD 294 million.

  1. AUSD 288 million
  2. BUSD 294 millionCorrect
  3. CUSD 384 million
  4. DUSD 392 million

Explanation

Unencumbered bonds are 400 - 100 = 300 million. Sale gives 300 x 0.98 = 294 million; repo gives 300 x 0.96 = 288 million. The larger is 294 million. Including pledged bonds would give 392 or 384, which is wrong because they are encumbered.

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