Skip to content

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

A mid-sized bank's treasury is designing a liquidity transfer pricing (LTP) framework. Which of the following best describes the primary purpose of LTP?

The main purpose of liquidity transfer pricing is to allocate liquidity costs and benefits to business units so their pricing, product and funding decisions reflect the true liquidity risk of the assets and liabilities they originate, aligning incentives with the bank's overall liquidity risk appetite.

  1. ATo allocate liquidity costs and benefits to business units so that funding decisions reflect the true liquidity risk of their assets and liabilitiesCorrect
  2. BTo set the bank's regulatory liquidity coverage ratio requirement for each business line
  3. CTo eliminate all interest rate risk from the banking book by matching asset and liability repricing dates
  4. DTo determine the dividend payout that the bank can sustain under stress

Explanation

LTP charges business units for the liquidity they use and credits them for liquidity they provide, aligning incentives with the bank's liquidity risk. Regulatory ratios are set by supervisors, interest rate risk is a separate matter, and dividend policy is unrelated to LTP.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Transfer Pricing: A Guide to Better Practice shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Transfer Pricing: A Guide to Better PracticeFree diagnostic mock

More Liquidity Transfer Pricing: A Guide to Better Practice questions