FRM Part II · FRM Exam Part II · Liquidity Risk
During a stress, a bank plans to raise cash by selling a bond portfolio with a market value of USD 500 million. The treasurer assumes a 10% haircut in normal markets, but the stress scenario calls for a 25% haircut. What is the additional cash shortfall relative to the normal-market assumption?
Normal-market proceeds are USD 450 million after a 10% haircut, while stressed proceeds are USD 375 million after a 25% haircut. The difference, a USD 75 million additional shortfall, shows why a CFP must use stressed haircuts rather than normal-market values for asset sales.
- AUSD 75 millionCorrect
- BUSD 50 million
- CUSD 125 million
- DUSD 25 million
Explanation
Normal proceeds = 500 x 0.90 = 450. Stressed proceeds = 500 x 0.75 = 375. Shortfall = 450 - 375 = 75. Using 10% alone gives 50, and using 25% alone gives 125, which are not the difference.
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