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

A bank projects 30-day stressed cash outflows of USD 900 million and stressed inflows of USD 300 million. Its buffer holds USD 400 million of cash, USD 500 million of government bonds with a 5% haircut under stress, and USD 200 million of corporate bonds with a 20% haircut under stress. What is the surplus or shortfall of the buffer versus the stressed net outflow?

Stressed net outflow is USD 600 million. The haircut-adjusted buffer is 400 plus 475 plus 160, or USD 1,035 million. The surplus is USD 435 million. Haircuts must be applied to the securities before comparing with net outflows.

  1. ASurplus of USD 435 million
  2. BSurplus of USD 35 millionCorrect
  3. CSurplus of USD 500 million
  4. DShortfall of USD 165 million

Explanation

Net outflow = 900 - 300 = 600. Buffer after haircuts = 400 + 500x0.95 + 200x0.80 = 400 + 475 + 160 = 1,035. Surplus = 1,035 - 600 = 435. So the correct figure is a surplus of 435; option 0 is correct, the stated key is wrong.

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