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FRM Part II · FRM Exam Part II · Illiquid Assets

A fund of USD 500 million has USD 200 million in liquid assets and USD 300 million in illiquid assets. Unfunded commitments are USD 100 million. In a stress, liquid assets fall 25%, the fund must pay a USD 60 million capital call, and redemptions of USD 40 million are requested. The fund meets cash needs only from liquid assets. After meeting these, what fraction of the remaining portfolio (illiquid assets plus remaining liquid assets, with illiquid values unchanged) is illiquid?

The illiquid share rises to 85.7%. Liquid assets fall 25% to USD 150 million, then USD 100 million of capital calls and redemptions leaves USD 50 million. Illiquid assets of USD 300 million are then 300 out of 350 total, which shows the denominator effect.

  1. A300/350 = 85.7%Correct
  2. B300/390 = 76.9%
  3. C300/450 = 66.7%
  4. D300/410 = 73.2%

Explanation

Liquid assets after fall = 200 x 0.75 = 150. Cash needs = 60 + 40 = 100. Remaining liquid = 50. Illiquid share = 300/(300+50) = 85.7%. The 76.9% option misses... it uses 90 remaining liquid; 66.7% uses 150 with no cash outflow; 73.2% uses 110 remaining.

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