Liquidity and Treasury Risk Measurement and Management

A bank's liquidity buffer holds government bonds worth $800 million (haircut 2%), agency mortgage-backed securities worth $400 million (haircut 10%) and investment-grade corporate bonds worth $300 million (haircut 25%). Its 30-day stressed net cash outflow is $1,250 million. Comparing the buffer after haircuts with the outflow, the bank has:

Which exposure creates contingent liquidity risk for a bank?

What distinguishes endogenous liquidity risk from exogenous liquidity risk?

Which situation is an example of funding liquidity risk rather than market liquidity risk?

A bank holds Level 1 assets of $5,000 million, Level 2A assets of $2,000 million and Level 2B assets of $600 million, at market value. Level 2A assets take a 15% haircut and Level 2B assets a 50% haircut. After haircuts, Level 2 assets may be at most 40% of the HQLA stock and Level 2B at most 15%. The bank's HQLA stock is closest to:

A bank holds $3,000 million of Level 1 assets and $3,000 million (market value) of Level 2A assets, with no Level 2B assets. Level 2A assets take a 15% haircut, and after haircuts Level 2 assets may make up at most 40% of the HQLA stock. The bank's HQLA stock is closest to:

Other things equal, which action raises a bank's liquidity coverage ratio?

Which statement correctly contrasts the liquidity coverage ratio (LCR) with the net stable funding ratio (NSFR)?

A fund holds 3,600,000 shares of a stock whose average daily trading volume is 1,500,000 shares. To limit price impact, it will sell no more than 20% of each day's average volume. The number of trading days needed to exit the position is closest to:

A bank holds a thinly traded position that would take about 20 days to exit in a stress. Why does a one-day VaR understate its risk?

Why does liquidity transformation by a commercial bank expose it to runs?

A trader holds 500,000 shares quoted at a bid of $39.70 and an ask of $40.30. Daily returns are normal with zero mean and volatility 1.8%, and the one-tailed 99% z-value is 2.326. VaR is computed on the position's mid-price value and reported as a positive loss. Adding the cost of crossing half the spread, the one-day 99% liquidity-adjusted VaR is closest to:

Why can a liquidity adjustment based on the average bid-ask spread in normal markets understate the liquidity-adjusted VaR?

An $80 million position has a one-day 99% VaR of $5.0 million. Its constant relative bid-ask spread is 1.25%. With the liquidity cost set at half the spread times the position value, the liquidity adjustment raises VaR by a percentage closest to:

A portfolio has a one-day 99% VaR of $3.20 million, reported as a positive loss. It holds three positions: $30 million with a constant relative spread of 0.2%, $12 million with 1.5% and $8 million with 4.0%. Adding half of each position's spread cost to VaR, the liquidity-adjusted VaR is closest to:

A portfolio's one-day 99% VaR is $2.00 million. It holds $40 million of asset A, whose relative spread has mean 0.4% and standard deviation 0.2%, and $10 million of asset B, whose spread has mean 2.0% and standard deviation 1.6%. For each asset the liquidity cost is half of (mean spread + 3 x spread standard deviation) times the position value, and the costs are added. The liquidity-adjusted VaR is closest to:

A hedge fund has $40 million of equity and holds as many bonds as it can finance by repo at a 4% haircut, so equity covers exactly the haircut. Bond prices then fall 2%, and lenders raise the haircut to 10%. Assuming no new equity is raised, the market value of bonds the fund must sell to restore the haircut requirement is closest to:

Market liquidity is often described by its tightness, depth and resilience. Which statement describes resilience?

Other things equal, which change raises a bank's net stable funding ratio?

A bank's funding is: regulatory capital $1,200 million (available stable funding factor 100%), stable retail deposits $5,000 million (95%), less stable retail deposits $2,000 million (90%) and funding under one year from nonfinancial corporates $2,500 million (50%). Its assets are: Level 1 HQLA $2,000 million (required stable funding factor 0%), Level 2A HQLA $1,000 million (15%), residential mortgages $4,000 million (65%), corporate loans over one year $5,000 million (85%), loans to financial institutions under six months $500 million (10%) and fixed assets $400 million (100%). Its net stable funding ratio is closest to:

A bank has available stable funding of $6,300 million and required stable funding of $7,000 million. It plans to replace funding from nonfinancial corporates maturing within one year (available stable funding factor 50%) with three-year senior bonds (factor 100%), leaving its assets unchanged. The amount it must replace to reach a net stable funding ratio of 100% is closest to:

A desk must exit a large position. How does the speed of liquidation affect its liquidation risk?

A corporate bond is quoted at a bid of 47.20 and an ask of 48.80. The relative (proportional) bid-ask spread, measured against the mid price, is closest to:

A money market fund lends $95 million in a repo against bonds with a market value of $100 million. The borrower defaults when the bonds have fallen 7% in value, and selling them costs a further 1% of their value at that time. Ignoring accrued interest, the fund's loss is closest to:

A borrower repos bonds with a market value of $100 million at a 5% haircut and receives $95 million in cash. The bonds' market value falls to $96 million. The lender requires the 5% haircut to be restored, and the borrower will meet the call by delivering more of the same bonds. The market value of additional bonds required is closest to:

An investor has $10 million of equity and can finance bond purchases by repo at a 5% haircut, so its equity must cover the haircut on every bond it holds. The largest bond position it can hold is closest to:

Why does reliance on overnight repo create funding liquidity risk for a securities dealer?

A dealer owns a bond that is on special in the repo market. The general collateral repo rate is 3.10% and the special repo rate for this bond is 0.60%, both actual/360. The dealer finances $25,000,000 against the bond for 30 days. Compared with financing at the general collateral rate, its interest saving is closest to:

Why does a particular government bond sometimes trade on special, with a repo rate well below the general collateral rate?

A bank holds a liquidity buffer worth $2,400 million after haircuts. Its stress scenario has net cash outflows of $150 million a day for the first 10 days and $60 million a day after that. It has no other sources of funds. The number of days the buffer lasts is closest to:

In a contingency funding stress test, a bank's net outflows are $900 million in week 1, $600 million in week 2, $400 million in each of weeks 3 and 4, and $300 million a week after that. Its sources are $1,000 million of cash, $1,000 million (market value) of HQLA that can be sold at a 5% loss, and $800 million of loans that can be pledged to the central bank at a 30% haircut. The number of full weeks the bank can meet its outflows is:

A bank's repricing schedule, in $ millions, shows rate-sensitive assets and liabilities of 400 and 650 in 0 to 3 months, 300 and 250 in 3 to 6 months, 500 and 380 in 6 to 12 months, and 900 and 300 in 1 to 5 years. Treating everything that reprices within a year as repricing at once, the change in net interest income over the next year if rates fall by 100 basis points is:

A bank funds $800 million of floating-rate loans, which reprice fully with market rates, with $800 million of non-maturity deposits that have a deposit beta of 0.40. Market rates rise by 150 basis points and deposit rates adjust by beta times the market change. The change in annual net interest income is:

A bank models a $500 million block of non-maturity deposits as running off at 12% of the remaining balance each year. The balance expected to remain after three years is closest to:

A bank's internal 30-day stress test applies these run-off rates: insured retail deposits of $3,000 million at 3%, uninsured retail deposits of $1,200 million at 15%, operational corporate deposits of $1,500 million at 20%, non-operational corporate deposits of $1,000 million at 50% and brokered deposits of $400 million at 100%. It holds a liquid buffer of $1,350 million. Comparing the buffer with the stressed outflows, the bank has:

A bank has total assets of $2,000 million and a leverage-adjusted duration gap of 3.0, measured with Macaulay durations. Its yields are 5% and rise by 50 basis points. With the change in equity = -duration gap x assets x change in yield / (1 + yield), the change in the market value of equity is:

A bank has assets of $800 million with a duration of 3.5 and liabilities of $720 million with a duration of 1.5. The duration of its equity, (DA x A - DL x L) / E, is closest to:

Which is a market-based early warning indicator of funding stress at a bank?

Treasury assumes 10% of a $200 million block of corporate deposits could run off in a stress, so it holds HQLA equal to that amount. The HQLA yield 2.8%, while the deposits are credited a transfer price of 4.0% before any liquidity charge. To recover the cost of carrying the buffer, the annual charge against the deposits, as a percentage of the deposit balance, is closest to:

A business line holds a $250 million loan book yielding 5.9%. Its transfer price is 4.1%, expected credit losses are 0.6% of the balance a year and operating costs are 0.5% a year. The annual contribution after the transfer charge, expected loss and costs is closest to:

A bank prices a loan so that it covers all costs exactly. The loan is funded 92% by debt charged at a transfer price of 4.0% and 8% by equity that requires a 12% return. Expected credit loss is 0.6% a year and operating costs are 0.5% a year. Ignoring taxes, the required loan rate is closest to:

What is the main purpose of a matched-maturity funds transfer pricing system?

What is the main weakness of a single pool funds transfer pricing system?

A bank's transfer pricing curve leaves out any term liquidity premium. What is the most likely effect on its lending?

Treasury charges $400 million of five-year fixed-rate loans a matched-maturity transfer price of 4.3%, fixed for five years. It chooses to fund them with one-year borrowing at 3.6%, which it must refinance each year at the then one-year rate. If the one-year rate is 150 basis points higher when the funding is refinanced, treasury's margin on this position in the second year is:

A bank has a positive one-year repricing gap and a large positive duration gap, because it holds long-dated fixed-rate bonds funded partly by floating-rate deposits. Rates rise in a parallel shift. Which outcome is most likely?

Why does a bank measure interest rate risk with economic value of equity (EVE) as well as with one-year net interest income (NII)?

Over the next year a bank has $820 million of rate-sensitive assets and $1,050 million of rate-sensitive liabilities. All of them reprice immediately when rates change. If rates rise by 80 basis points, the change in annual net interest income is:

A bank's repricing gaps, in $ millions, are −300 for 0 to 1 month, +200 for 1 to 3 months, −150 for 3 to 6 months and +100 for 6 to 12 months. Each bucket reprices at its midpoint (0.5, 2, 4.5 and 9 months) and then earns or pays the new rate for the rest of the year. Rates rise by 100 basis points today. The change in net interest income over the next 12 months is:

In a bank-specific stress, which deposits are most likely to be withdrawn first?