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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A treasurer needs a portfolio component that can be converted to cash quickly at minimal price impact to meet unexpected outflows. Which instrument is the most suitable?

Short-dated Treasury bills are most suitable because they trade in deep markets, have minimal price sensitivity and can be sold or repoed quickly with little price impact. Private placements, low-tranche CDOs and small-issuer long municipals are illiquid and would sell at large discounts under stress.

  1. AShort-dated Treasury billsCorrect
  2. BUnrated 15-year private placement notes
  3. CLower-tranche collateralized debt obligation securities
  4. DLong-term municipal bonds from a small issuer

Explanation

Treasury bills are highly liquid, short-dated and low-risk, with deep markets and minimal bid-ask spreads. The other options are illiquid, complex or thinly traded and would incur large discounts when sold under stress.

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