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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank's risk appetite statement says the securities portfolio must be able to cover stressed net outflows for 30 days without selling assets at a loss beyond a tolerance. Which policy feature best translates this appetite into an operational control?

A minimum buffer of high-quality liquid assets sized to stressed 30-day net outflows, with haircuts by asset class, turns the liquidity appetite into a measurable control. Yield targets, held-to-maturity mandates or rating bans do not guarantee the ability to meet stressed outflows.

  1. AA minimum holding of high-quality liquid assets sized to stressed 30-day outflows, with a haircut applied to each asset classCorrect
  2. BA maximum yield target for the portfolio
  3. CA requirement that all securities be held to maturity
  4. DA ban on securities with ratings below AAA regardless of liquidity

Explanation

Sizing a liquid buffer to stressed 30-day outflows after haircuts directly links the appetite to a measurable limit. Yield targets, blanket held-to-maturity rules and rating bans do not ensure liquidity under stress; held-to-maturity can in fact impede sales.

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