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FRM Part II · FRM Exam Part II · Liquidity Risk Management

Which statement best describes the purpose of a liquidity gap (cash flow ladder) analysis as a liquidity risk measurement tool?

A liquidity gap analysis lays out net cash inflows and outflows across time buckets, contractual and behaviorally assumed, to expose funding mismatches and cumulative shortfalls. It is not a market VaR, a default model or an interest rate sensitivity measure.

  1. AIt estimates the probability that the bank's market portfolio loses more than a threshold over one day
  2. BIt shows net contractual and assumed cash inflows and outflows across time buckets to reveal funding mismatchesCorrect
  3. CIt converts credit ratings into default probabilities for funding counterparties
  4. DIt measures the sensitivity of net interest income to a parallel shift in the yield curve

Explanation

A liquidity gap or maturity ladder maps expected cash inflows and outflows into time buckets and highlights cumulative mismatches that must be funded. The other options describe VaR, credit modeling and interest rate gap analysis respectively.

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