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FRM Part II · FRM Exam Part II · Monitoring Liquidity

Which statement about reverse stress testing in liquidity risk management is most accurate?

Reverse stress testing starts from a defined failure outcome, such as exhausting the liquidity buffer, and works backward to identify the scenarios and assumptions that could cause it. This reveals hidden vulnerabilities that conventional forward scenarios may miss.

  1. AIt starts from a defined failure outcome, such as exhausting the liquidity buffer, and identifies the scenarios that could cause itCorrect
  2. BIt applies the same historical scenario each year to compare results
  3. CIt estimates the average daily outflow in normal conditions
  4. DIt is used only to calculate regulatory ratios

Explanation

Reverse stress testing begins with an unacceptable outcome, such as the buffer running out, and works backward to find the events and assumptions that cause it. This helps reveal vulnerabilities not captured by conventional scenarios. The other choices describe different exercises.

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