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

Which practice is most consistent with good-practice LTP governance?

Good-practice LTP has treasury set transfer prices under senior management oversight, applies them consistently across the bank, reviews them regularly as market funding conditions change, and makes them transparent so business units can respond to the incentives they create.

  1. ATransfer prices are set by treasury under senior management oversight, applied consistently across the bank, reviewed regularly and made transparent to business unitsCorrect
  2. BTransfer prices are negotiated bilaterally each quarter between each business unit and treasury to maximize unit profit
  3. CTransfer prices are kept confidential from business units to prevent gaming
  4. DTransfer prices are fixed once at inception and never updated even when market funding conditions change

Explanation

Good practice requires clear governance, consistent application, regular review as funding conditions change, and transparency so business units can respond to the price signals. Bilateral negotiation, secrecy and static pricing undermine the incentives LTP is meant to create.

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