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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

A bank's treasury credits business units for stable core deposits. Retail demand deposits of USD 400 million are assessed as having a behavioral life such that 70% is stable and priced at the 5-year liquidity rate of 2.0%, while the remaining 30% is priced at the overnight rate of 0.5%. What is the blended annual liquidity credit in USD million?

The blended liquidity credit is USD 6.2 million. The stable USD 280 million earns 2.0%, giving 5.6 million, and the volatile USD 120 million earns 0.5%, giving 0.6 million. Summing the two tranches yields the total credit for the deposit book.

  1. A8.0
  2. B5.6
  3. C6.2Correct
  4. D2.6

Explanation

Stable portion = 400 x 0.70 = 280 million; credit = 280 x 2.0% = 5.6 million. Volatile portion = 120 million x 0.5% = 0.6 million. Total = 6.2 million. The 5.6 figure omits the credit on the volatile portion.

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