Financial Risk Management Liquidity Risk Management 3

Question 1

Market liquidity risk differs from funding liquidity risk in that it relates to:

Accepted Answer

The risk of being unable to sell or unwind a position without significantly affecting its market price

Answer

Market liquidity risk is the risk that selling a position will move the market against you—bid-ask spreads widen and depth disappears in stress.

Question 2

Under Basel III, the minimum LCR requirement for internationally active banks is:

Accepted Answer

100%

Answer

The Basel III LCR standard requires internationally active banks to maintain a minimum LCR of 100% at all times under the fully phased-in framework.

Question 3

A bank that relies heavily on short-term wholesale funding faces elevated liquidity risk because:

Accepted Answer

Short-term wholesale funding can evaporate quickly during market stress as investors choose not to roll

Answer

Short-term wholesale funding is highly confidence-sensitive; institutions like Lehman Brothers lost access overnight when market confidence evaporated in 2008.

Question 4

What is the 'survival horizon' in liquidity risk management?

Accepted Answer

The length of time a firm can survive without access to external funding using only its liquid assets

Answer

Survival horizon is the time a firm can sustain operations relying solely on its liquidity buffer under a stress scenario without new external funding.

Question 5

Which instrument is commonly used by central banks to provide emergency liquidity to commercial banks?

Accepted Answer

Discount window lending and standing repo facilities

Answer

Central banks act as lenders of last resort through facilities like the Federal Reserve's discount window, providing collateralized loans to solvent but illiquid institutions.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Liquidity Risk Management 3