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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A supervisor assesses the liquidity risk of an open-ended private credit vehicle that offers quarterly redemptions while holding illiquid direct loans. Which is the most appropriate concern?

The liquidity mismatch is the concern. Quarterly redemptions against illiquid loans can force discounted asset sales or gating if many investors redeem at once, which amplifies stress. Hold-to-maturity intent does not provide cash for redemptions, and illiquidity does not prevent run dynamics.

  1. ALiquidity mismatch may force asset sales at discounts or redemption gates, amplifying stress if many investors redeem togetherCorrect
  2. BThe mismatch is irrelevant because loans are held to maturity
  3. CRedemptions reduce risk by shrinking leverage in all cases
  4. DIlliquid loans make the fund immune to run behavior

Explanation

Offering regular redemptions against illiquid loans creates a liquidity mismatch, so concentrated redemptions may force discounted sales or gates, which can amplify stress. Holding to maturity does not meet redemption demand. Redemptions do not always lower risk, and illiquidity does not prevent runs.

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