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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

Which practice best addresses the implementation challenge that business lines dispute LTP charges as opaque and may try to arbitrage the system?

Publishing the LTP methodology, inputs and update frequency internally, combined with regular independent validation, best addresses opacity and arbitrage. It lets business lines understand the price signals and limits gaming, whereas bilateral negotiation, uniform rates or restricted disclosure undermine consistency and trust.

  1. APublishing the methodology, inputs and update frequency internally, and reviewing it regularly with independent validationCorrect
  2. BNegotiating each transfer rate bilaterally with every business line
  3. CApplying the same rate to every product irrespective of behaviour
  4. DDisclosing rates only to treasury staff

Explanation

Transparency about methodology and inputs, with regular independent review, builds acceptance and limits gaming. Bilateral negotiation invites inconsistency and arbitrage, uniform rates ignore behaviour, and restricting disclosure leaves business lines unable to understand or respond to price signals.

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