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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank reports a cumulative liquidity gap by time bucket. Net cash flows (inflows minus outflows) in USD million are: overnight -20, 2-7 days -35, 8-30 days +25, 31-90 days +10. Counterbalancing capacity (unencumbered liquid assets available to raise cash) is USD 50 million, usable at any time. What is the earliest bucket in which the cumulative gap, after counting the counterbalancing capacity, turns negative?

The cumulative gap first turns negative in the 2-7 day bucket. Cumulative net flows reach minus USD 55 million there, and USD 50 million of counterbalancing capacity leaves a USD 5 million shortfall. The overnight bucket is covered, and later inflows restore the position.

  1. AOvernight
  2. B2-7 daysCorrect
  3. C8-30 days
  4. DIt never turns negative

Explanation

Cumulative gaps: overnight -20, by 7 days -55, by 30 days -30, by 90 days -20. Adding 50 of capacity: +30, -5, +20, +30. The first negative is the 2-7 day bucket. Overnight is wrong because the capacity covers the -20.

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