FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities
A treasurer must choose between two wholesale funding plans of USD 400 million. Plan A uses overnight federal funds purchased. Plan B uses a mix of 3-month term CDs and 6-month Eurodollar deposits staggered across maturities. The bank expects market stress within a quarter. Which assessment is most appropriate?
Plan B is more appropriate: staggered term CDs and Eurodollar deposits limit how much funding must be refinanced during a stress window, lowering rollover concentration. It likely costs more through term premiums, but overnight federal funds can disappear immediately with no obligation to roll.
- APlan B better limits refinancing concentration, because staggered term funding reduces the amount needing renewal in any stress period, though it may cost moreCorrect
- BPlan A is safer because overnight funds can be repriced quickly, avoiding term premium
- CBoth plans carry identical liquidity risk because all are unsecured wholesale funding
- DPlan A is safer because federal funds counterparties are legally required to roll positions
Explanation
Term and staggered maturities spread refinancing needs and reduce the volume maturing during stress, at the cost of a term premium. Overnight funding must be renewed daily and can vanish instantly. No legal obligation to roll exists, and maturity profile clearly differentiates liquidity risk.
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