4 - Liquidity and Treasury Risk Measurement & Management

Question 1

Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).

Answer 1

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Question 2

Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and Metallgesellschaft.

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Question 3

Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.

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Question 4

Explain liquidity black holes and Identify the causes of positive feedback trading.

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Question 5

Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).

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Question 6

Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and Metallgesellschaft.

Answer 6

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Question 7

Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.

Answer 7

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Question 8

Explain liquidity black holes and Identify the causes of positive feedback trading.

Answer 8

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Question 9

Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.

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Question 10

Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve).

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Question 11

Discuss the applications of EWIs in the context of the liquidity risk management process.

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Question 12

Compare various money market and capital market instruments and discuss their advantages and disadvantages.

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Question 13

Identify and discuss various factors that affect the choice of investment securities by a bank.

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Question 14

Apply investment maturity strategies and maturity management tools based on the yield curve and duration.

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Question 15

Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a bank.

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Question 16

Compare strategies that a bank can use to meet demands for additional liquidity.

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Question 17

Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicators).

Answer 17

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Question 18

Summarize the process taken by a US bank to calculate its legal reserves.

Answer 18

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Question 19

Differentiate between factors that affect the choice among alternate sources of reserves.

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Question 20

Identify and explain the uses and sources of intraday liquidity.

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Question 21

Discuss the governance structure of intraday liquidity risk management.

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Question 22

Differentiate between methods for tracking intraday flows and monitoring risk levels.

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Question 23

Distinguish between deterministic and stochastic cash flows and provide examples of each.

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Question 24

Describe and provide examples of liquidity options and explain the impact of liquidity options on a bank’s liquidity position and its liquidity management process.

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Question 25

Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, and cash flow at risk.

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Question 26

Interpret the term structure of expected cash flows and cumulative cash flows.

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Question 27

Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.

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Question 28

Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of business.

Answer 28

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Question 29

Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.

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Question 30

Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.

Answer 30

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Question 31

Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of business.

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Question 32

Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.

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Question 33

Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.

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Question 34

Identify best practices for the reporting of a bank’s liquidity position.

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Question 35

Compare and Interpret different types of liquidity risk reports.

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Question 36

Explain the process of reporting a liquidity stress test and Interpret a liquidity stress test report.

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Question 37

Discuss the relationship between contingency funding planning and liquidity stress testing.

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Question 38

Evaluate the key design considerations of a sound contingency funding plan.

Answer 38

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Question 39

Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis, contingent actions, monitoring and escalation, and data and reporting).

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Question 40

Differentiate between the various transaction and non-transaction deposit types.

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Question 41

Compare the different methods used to determine the pricing of deposits and calculate the price of a deposit account using cost-plus, marginal cost, and conditional pricing formulas.

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Question 42

Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection, and basic (lifeline) banking.

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Question 43

Distinguish between the various sources of non-deposit liabilities at a bank.

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Question 44

Describe and calculate the available funds gap.

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Question 45

Discuss factors affecting the choice of non-deposit funding sources.

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Question 46

Calculate overall cost of funds using both the historical average cost approach and the pooled-funds approach.

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Question 47

Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction.

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Question 48

Discuss common motivations for entering into repos, including their use in cash management and liquidity management.

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Question 49

Discuss how counterparty risk and liquidity risk can arise through the use of repo transactions.

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Question 50

Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2009 financial crisis.

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Question 51

Compare the use of general and special collateral in repo transactions.

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Question 52

Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.

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Question 53

Calculate the financing advantage of a bond trading special when used in a repo transaction.

Answer 53

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Question 54

Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation of an LTP process.

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Question 55

Discuss challenges that may arise for banks during the implementation of LTP.

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Question 56

Compare the various approaches to liquidity transfer pricing (zero cost, average cost, and matched-maturity marginal cost).

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Question 57

Describe the contingent liquidity risk pricing process and calculate the cost of contingent liquidity risk.

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Question 58

Identify the causes of the US dollar shortage during the financial crisis of 2007-2009.

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Question 59

Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated entities.

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Question 60

Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last resort.

Answer 60

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Question 61

Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps.

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Question 62

Identify key factors that affect the cross-currency swap basis.

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Question 63

Assess the causes of covered interest rate parity violations after the financial crisis of 2007-2009.

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Question 64

Discuss how asset-liability management strategies can help a bank hedge against interest rate risk.

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Question 65

Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin.

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Question 66

Describe duration gap management and apply this strategy to protect a bank’s net worth.

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Question 67

Discuss the limitations of interest-sensitive gap management and duration gap management.

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Question 68

Evaluate the characteristics of illiquid markets.

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Question 69

Examine the relationship between market imperfections and illiquidity.

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Question 70

Assess the impact of biases on reported returns for illiquid assets.

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Question 71

Explain the unsmoothing of returns and its properties.

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Question 72

Compare illiquidity risk premiums across and within asset categories.

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Question 73

Evaluate portfolio choice decisions on the inclusion of illiquid assets.

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