FRM Part II · FRM Exam Part II · Monitoring Liquidity
A treasurer builds a cash flow projection under a stressed scenario. Which assumption set is most consistent with sound practice for stressed projections?
Sound stressed projections assume higher run-off of uninsured and wholesale funding, larger drawdowns on committed facilities, and haircuts on liquid assets when sold or pledged. Assuming full rollover or sales at book value understates the stress shortfall.
- ARetail deposits roll over fully, wholesale funding is renewed, and committed lines are undrawn
- BContractual maturities only, with no change in customer behavior
- CHigher run-off of uninsured and wholesale funding, increased drawdowns on committed facilities, and haircuts on liquid assetsCorrect
- DAsset sales at book value with no market impact
Explanation
Stress projections should reflect adverse behavior: faster run-off of less stable funding, drawdowns on commitments, and haircuts or delays in monetizing assets. The other options assume benign behavior or no market impact, which defeats the purpose of a stress.
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