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FRM Part II · FRM Exam Part II · Tokenization and Financial Market Inefficiencies

A bank's treasury manages collateral across three silos, each holding USD 100 million of eligible securities, while one silo faces a USD 140 million margin call and the others have no needs. Because assets cannot move between silos quickly, the bank must source USD 40 million externally at a funding cost of 5% annualized, held for 10 days (use 360-day year). What is the approximate cost of this fragmentation friction?

Borrowing USD 40 million at 5% for 10 days on a 360-day basis costs 40,000,000 × 0.05 × 10/360, about USD 55,556. This is the funding cost of collateral trapped in silos that cannot be mobilized quickly.

  1. AUSD 20,000
  2. BUSD 55,556Correct
  3. CUSD 200,000
  4. DUSD 5,556

Explanation

Cost = 40,000,000 × 5% × 10/360 = USD 55,556. USD 5,556 misplaces a decimal. USD 20,000 ignores the 360 basis scale incorrectly, and USD 200,000 uses a full year (40m × 5% = 2m is not it either), so it is wrong.

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