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

A risk manager reviews a stablecoin that promises redemption at par. Its reserve holds 60% in cash and overnight deposits and 40% in longer-dated bonds. Which risk feature most directly makes the coin vulnerable to a run-like redemption event?

The key vulnerability is promising par redemption on demand while holding reserves that can lose value or be hard to sell quickly, like longer-dated bonds. Fear of a shortfall encourages early redemption, forcing asset sales at discounts and creating a run dynamic similar to money market funds.

  1. ARedemption at par on demand against reserves that include assets that may fall in value or be hard to sell quicklyCorrect
  2. BThe coin being issued on a blockchain with public transaction records
  3. CThe use of the coin in tokenized asset settlement
  4. DThe reserve holding any cash at all

Explanation

Run vulnerability arises from the mismatch between on-demand par redemption and reserves with price or liquidity risk, such as longer-dated bonds. If holders fear a shortfall, they redeem first, forcing fire sales. Public ledger transparency or cash holdings do not create this mismatch.

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