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FRM Part II · FRM Exam Part II · Illiquid Assets

A fund has a liquid portfolio of $600 million and unfunded private fund commitments of $200 million. Assume 50% of the commitments are called within a year. In a stress, liquid assets fall 25% in value, and the fund needs to keep liquid assets at least 3 times the expected calls. Ignoring distributions, what is the surplus or shortfall of liquid assets relative to this requirement?

Stressed liquid assets are $450 million after a 25% fall. Expected calls are $100 million, so the 3 times coverage requirement is $300 million. The fund therefore has a surplus of $150 million, ignoring distributions.

  1. ASurplus of $150 millionCorrect
  2. BShortfall of $0 million exactly
  3. CShortfall of $50 million
  4. DSurplus of $350 million

Explanation

Stressed liquid assets = 600 × 0.75 = $450 million. Expected calls = 0.5 × 200 = $100 million; requirement = 3 × 100 = $300 million. Surplus = 450 − 300 = $150 million. Using unstressed assets gives $300 million surplus before... 600−300 = 300, and using all commitments gives a different, wrong requirement.

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