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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's CFP lists a sale of a securities portfolio with market value USD 400 million as a contingent source. Guidance stresses that CFP sources must be realistic under stress. The bank applies a 15% haircut for market stress, and USD 100 million of the portfolio (at market value) is already pledged as collateral and unavailable. What is the liquidity the CFP should count from this portfolio?

The CFP should count USD 255 million. Remove the USD 100 million already pledged, leaving USD 300 million unencumbered, then apply the 15% stress haircut, giving 300 times 0.85. Encumbered assets cannot be sold or pledged again, and stress haircuts reduce realisable value.

  1. AUSD 255 millionCorrect
  2. BUSD 300 million
  3. CUSD 340 million
  4. DUSD 225 million

Explanation

Unencumbered value = 400 - 100 = 300 million. Applying the 15% haircut: 300 x 0.85 = 255 million. Applying the haircut to the full 400 gives 340, ignoring encumbrance. Ignoring the haircut gives 300. 225 results from deducting both 100 and 15% of 400 wrongly... in any case 255 is correct.

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