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

A bank's CFP stress test shows that under a severe combined scenario the cumulative net outflow over 14 days is USD 600 million. Its unencumbered liquid assets are: USD 300 million of cash and central bank reserves, USD 400 million of government bonds with a 5% stressed haircut, and USD 200 million of corporate bonds with a 30% stressed haircut. What is the survival-horizon surplus or shortfall after haircuts?

After stressed haircuts, liquid assets are 300 + 380 + 140 = 820 million. Subtracting the 600 million net outflow leaves a surplus of 220 million. Using unhaircut values would overstate the surplus at 300 million.

  1. ASurplus of USD 220 millionCorrect
  2. BSurplus of USD 300 million
  3. CSurplus of USD 80 million
  4. DShortfall of USD 20 million

Explanation

Cash 300 + government bonds 400 x 0.95 = 380 + corporates 200 x 0.70 = 140 gives 820. Less net outflow of 600 leaves a surplus of 220. Ignoring haircuts gives 900 - 600 = 300, which is wrong because stressed market values fall.

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