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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank holds USD 400 million of securities. It must pledge USD 120 million as collateral for public deposits, and USD 60 million is encumbered in repo. Its policy requires unencumbered securities to cover at least 40% of the USD 300 million of expected 30-day stressed outflows, ignoring haircuts. Which is correct?

Unencumbered securities equal 400 − 120 − 60 = USD 220 million. The requirement is 40% of 300, or USD 120 million, so the bank meets it with a USD 100 million surplus. Pledged and repo securities cannot count as liquidity.

  1. AUnencumbered securities are USD 220 million, which meets the USD 120 million requirement with a USD 100 million surplusCorrect
  2. BUnencumbered securities are USD 280 million, which meets the requirement with a USD 160 million surplus
  3. CUnencumbered securities are USD 340 million, which exceeds the requirement by USD 220 million
  4. DUnencumbered securities are USD 220 million, which falls USD 20 million short of the requirement

Explanation

Unencumbered = 400 − 120 − 60 = 220. Requirement = 40% × 300 = 120. Surplus = 100. Option with 280 ignores the repo encumbrance; 340 ignores the pledge in addition to repo.

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