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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

A bank provides a committed, undrawn credit line of 200 million to a corporate client. Treasury estimates that 30% of the line would be drawn in a stress scenario, and the stress-period liquidity premium for the relevant tenor is 150 bps per year. Using a simple approach that charges the contingent liquidity cost on the expected stressed drawdown, what annual contingent liquidity charge should be allocated to the business unit?

The annual charge is 0.9 million. The expected stressed drawdown is 30% of 200 million, or 60 million, and applying the 150 bps stress liquidity premium gives 0.9 million. Charging on the full 200 million would overstate the cost at 3.0 million.

  1. A0.9 millionCorrect
  2. B3.0 million
  3. C4.5 million
  4. D0.45 million

Explanation

Expected stressed drawdown = 200 x 30% = 60 million. Charge = 60 million x 1.50% = 0.9 million per year. Applying the premium to the full line gives 3.0 million, a wrong base. Using 200 x 30% x 150% gives 90 and scaling errors yield other values.

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