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

A bank's 30-day stressed net outflow is USD 800 million. It holds USD 1,000 million of unencumbered high-quality assets with a stressed haircut of 10%, but USD 250 million of these (pre-haircut market value) are already pledged as collateral for a repo that matures after the 30-day horizon. The treasurer then adds USD 150 million of additional collateral calls from a one-notch downgrade. What is the buffer surplus or shortfall?

Only unencumbered assets count: 1,000 minus 250 is 750, which is 675 after the 10% haircut. Required liquidity is 800 plus 150 of downgrade collateral calls, or 950. The buffer therefore has a shortfall of USD 275 million.

  1. AShortfall of USD 275 millionCorrect
  2. BShortfall of USD 50 million
  3. CSurplus of USD 100 million
  4. DShortfall of USD 125 million

Explanation

Unencumbered assets = 1,000 - 250 = 750. After the 10% haircut = 675. Required = 800 + 150 = 950. Result = 675 - 950 = -275, a shortfall of USD 275 million. Option 1 ignores the haircut and encumbrance, and option 3 ignores the collateral calls.

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