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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. Management wants the buffer to cover net stressed outflows with a 20% additional management margin on top. Assuming buffer assets are valued after haircuts, what minimum post-haircut buffer is required?

The required post-haircut buffer is USD 720 million. Net stressed outflow is 900 minus 300, or 600 million, and the 20% management margin raises it to 720 million. Applying the margin to gross outflows would wrongly give 1,080 million.

  1. AUSD 600 million
  2. BUSD 720 millionCorrect
  3. CUSD 1,080 million
  4. DUSD 1,440 million

Explanation

Net outflow = 900 - 300 = 600. Adding a 20% margin gives 600 x 1.20 = 720. Using gross outflows with the margin gives 1,080 (wrong base), and 600 omits the margin.

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