Liquidity & Treasury Risk

Question 1

What is liquidity risk

Answer 1

the risk that not enough cash will be generated to meet deposit withdrawals or contractual loans.

Question 2

what are two types of liquidity risk

Answer 2

1. funding liquidity risk
2. market liquidity risk

Question 3

define funding liquidity risk

Answer 3

the inability to liquidate assets or obtain adequate funding

Question 4

define market liquidity risk

Answer 4

inability to unwind or offset specific exposure without significantly lowering market prices.

Question 5

are liquidity risk and solvency risk the same?

Answer 5

no, a firm can be solvent but still unable to meet its obligations if assets > liabilities.

Question 6

define the liquidity coverage ratio

Answer 6

how adequate cash reserves are on a short time horizon.

Question 7

what is the formula for LCR

Answer 7

LCR=HQLA/(stressed net cash outflows over 30 days)

Question 8

which two ratios should be greater than 100%?

Answer 8

LCR, NSFR

Question 9

define net cumulative cash flow

Answer 9

a measurement of how long a bank can maintain positive liquidity in a stressed scenario.

Question 10

give the formula for NCCF

Answer 10

NCCF=central bank eligible liquid assets+cash inflows-cash outflows

Question 11

define the net stable funding ratio

Answer 11

a measurement of the stability of funding over one year.

Question 12

give the formula for NSFR

Answer 12

NSFR=(available amount of stable funding)/(required amount of stable funding)

Question 13

what does a treasury mandate do

Answer 13

manage the supply and demand of a bank’s capital, liquidity and funding across business lines and the consolidated bank

Question 14

what is the goal of a treasury mandate

Answer 14

maximize return on equity while meeting regulatory requirements and the firm’s risk appetite

Question 15

what is the main governance body of a bank

Answer 15

Asset-liability committee

Question 16

what are 4 types of interest rate risk

Answer 16

1. Gap/repricing risk
2. Basis risk
3. Yield curve risk
4. Option risk

Question 17

what is gap/repricing risk

Answer 17

the risk that arises because receiving cash flows are locked in at a certain rate while paying cash flows are subject to repricing as the rate changes over time.

Question 18

what is basis risk

Answer 18

the risk that the correlation between floating and fixed interest rates differ from the desired level.

Question 19

what is yield curve risk

Answer 19

the risk that interest rates will change and impact the returns of fixed-income securities.

Question 20

what is option risk

Answer 20

prepayment risk

Question 21

what is net interest income (NII) sensitivity

Answer 21

the impact to a bank’s income stream for the next 12 months assuming an immediate and sustained shock of ±100 bps to interest rates.

Question 22

what is economic value of equity (EVE) sensitivity

Answer 22

the impact to the PV of assets and liabilities in a bank’s balance sheet due to a static interest rate shock.

the change in economic value of equity (MTM) after an interest rate shock of ±100 bps.

Question 23

what are two sources of foreign exchange exposure and define each

Answer 23

o Corporate position: projected earnings in non-functional currency
o Structural position: capital denomination in non-functional currency.