You’re on a roll
Create a free account to save your FRM progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › FRM › Liquidity and Treasury Risk Management
Free FRM Liquidity and Treasury Risk Management Practice Questions & Answers
400 exam-style Liquidity and Treasury Risk Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
Liquidity risk in banking is best defined as:
Select an option first.
Correct answer: B — The risk that a bank cannot meet its financial obligations as they fall due without incurring unacceptable costs.
Explanation: Liquidity risk = inability to fund obligations on time without unacceptable cost. A is credit risk; C is interest rate risk; D is market risk.
Question 2
'Funding liquidity risk' refers to:
Select an option first.
Correct answer: B — The risk that an institution cannot obtain sufficient funding to meet its obligations as they come due.
Explanation: Funding liquidity risk is about raising cash. Market liquidity risk (A) is about selling assets without price impact. B is the definitional distinction.
Question 3
'Market liquidity risk' occurs when:
Select an option first.
Correct answer: B — A trader cannot quickly buy or sell an asset without significantly moving its price.
Explanation: Market liquidity risk = transaction cost risk. A and C are funding liquidity risks. D is monetary policy risk.
Question 4
The 'bid-ask spread' is primarily a measure of:
Select an option first.
Correct answer: B — Market liquidity — the cost of immediately buying then selling an asset.
Explanation: Bid-ask spread captures immediacy cost. Wider spread = less liquid. A is discount/premium; C is FX basis; D is term spread.
Question 5
A bank funding long-term mortgages with overnight interbank borrowing faces primarily:
Select an option first.
Correct answer: B — Funding liquidity risk from maturity mismatch — short-term liabilities must be rolled over continuously.
Explanation: Classic maturity mismatch: short-term funding + long-term assets = funding liquidity vulnerability.
Get the full FRM question bank — free
Drop your email and we'll send you fresh FRM practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 6
The Liquidity Coverage Ratio (LCR) requires banks to:
Select an option first.
Correct answer: B — Hold sufficient high-quality liquid assets (HQLA) to cover net cash outflows over a 30-day stress scenario.
Explanation: LCR = HQLA / Net 30-day outflows ≥ 100%. A is NSFR concept; C is reserve requirement; D is leverage ratio.
Question 7
The Net Stable Funding Ratio (NSFR) requires that:
Select an option first.
Correct answer: B — Available Stable Funding must be at least equal to Required Stable Funding over a one-year horizon.
Explanation: NSFR = ASF / RSF ≥ 100% over a 1-year horizon. A is the LCR; C and D are other ratios.
Question 8
'High-quality liquid assets' (HQLA) must primarily have:
Select an option first.
Correct answer: B — Low credit risk, low market risk, easy valuation, active trading in deep markets, and low correlation with risky assets during stress.
Explanation: HQLA requirements: low risk, easy to value, actively traded, liquid in stress. A and D contradict the definition.
Question 9
Level 1 HQLA under Basel III LCR includes:
Select an option first.
Correct answer: B — Cash, central bank reserves, and sovereign/central bank securities with 0% risk weight.
Explanation: Level 1 (no haircut, unlimited): cash, CB reserves, qualifying sovereign debt at 0% risk weight. C is Level 2B; D is Level 2A.
Question 10
A cash flow ladder in liquidity analysis shows:
Select an option first.
Correct answer: B — Net cash inflows and outflows in each future time bucket, revealing funding surpluses or deficits by maturity.
Explanation: Gap analysis maps contractual inflows/outflows to time buckets to identify funding gaps.
Question 11
The 'survival horizon' in liquidity risk management represents:
Select an option first.
Correct answer: B — The maximum period a bank can operate without wholesale market access using existing liquid assets.
Explanation: Survival horizon = how many days a bank can fund itself from its existing liquidity buffer under stress.
Question 12
A 'liquidity buffer' refers to:
Select an option first.
Correct answer: B — A stock of unencumbered high-quality liquid assets maintained to meet unexpected funding needs.
Explanation: The liquidity buffer is the practical HQLA reserve. B is the correct definition.
Question 13
A 'bank run' is primarily driven by:
Select an option first.
Correct answer: B — Loss of depositor or creditor confidence causing self-reinforcing withdrawal of funds — even a solvent bank can fail.
Explanation: Bank runs = confidence-driven coordination failure. Diamond-Dybvig: a self-fulfilling bad equilibrium.
Question 14
A 'contingency funding plan' (CFP) is:
Select an option first.
Correct answer: B — A documented plan specifying how a bank will respond to a liquidity crisis, including early warning indicators, escalation, and alternative funding sources.
Explanation: CFP = pre-planned framework for managing liquidity crises with EWIs, escalation, and action menu.
Question 15
'Intraday liquidity risk' refers to the risk that a bank:
Select an option first.
Correct answer: B — Cannot meet its payment obligations during the business day, creating settlement failures or requiring expensive daylight overdrafts.
Explanation: Intraday risk = RTGS settlement timing risk. B is correct; A,C,D mischaracterise the horizon.
Question 16
Prime brokerage creates liquidity risk because:
Select an option first.
Correct answer: B — Prime brokerage clients (hedge funds) can rapidly withdraw cash and securities — creating sudden large correlated funding outflows.
Explanation: Hedge fund PB clients are sophisticated and can move their entire book quickly, especially in stress.
Question 17
The most stable type of deposit in the LCR framework is:
Select an option first.
Correct answer: B — Retail deposits insured by a government deposit guarantee scheme.
Explanation: Insured retail deposits have the lowest run-off rate (3-5%) due to deposit insurance removing withdrawal incentive.
Question 18
'Encumbered assets' are:
Select an option first.
Correct answer: B — Assets pledged as collateral or otherwise unavailable to meet liquidity needs.
Explanation: Encumbered assets are pledged to third parties (repo, margin, cover pool) and unavailable for the liquidity buffer.
Question 19
A 'repo' transaction used for bank funding means:
Select an option first.
Correct answer: A — The bank sells assets and agrees to repurchase them later at a higher price, obtaining short-term cash secured by those assets.
Explanation: Repo = secured borrowing. Bank sells securities / receives cash / agrees to buy back at higher price. B is reverse repo; C is unsecured; D is CP.
Question 20
A 'repo haircut' refers to:
Select an option first.
Correct answer: B — The reduction applied to collateral market value when determining how much cash the borrower receives — protecting the lender against collateral value declines.
Explanation: Haircut = (MV - Cash) / MV. If bond = $100, haircut = 5%, cash = $95. Lender protected by $5 cushion.
Question 21
A bank's 'liquidity risk appetite' is best described as:
Select an option first.
Correct answer: B — The maximum liquidity risk the board is willing to tolerate, expressed through minimum survival horizons, minimum HQLA, and maximum funding concentrations.
Explanation: Liquidity risk appetite = board-approved maximum acceptable liquidity risk expressed in measurable terms.
Question 22
The difference between liquidity risk tolerance and appetite is:
Select an option first.
Correct answer: B — Appetite = desired risk level; tolerance = acceptable variation band before escalation is required.
Explanation: Risk appetite = where we want to be. Risk tolerance = how far we can stray before action is required.
Question 23
An 'idiosyncratic' liquidity stress scenario for a bank involves:
Select an option first.
Correct answer: B — A news report about alleged misconduct at the specific bank causing rapid depositor withdrawals.
Explanation: Idiosyncratic = bank-specific event. Systemic = market-wide. LCR combines both types.
Question 24
LCR net cash outflows = :
Select an option first.
Correct answer: B — Total outflows minus the minimum of (total inflows and 75% of outflows).
Explanation: Net outflows = Outflows − min(Inflows, 75%×Outflows). The 75% cap prevents over-reliance on assumed inflows.
Question 25
Which activity increases a bank's funding liquidity risk?
Select an option first.
Correct answer: B — Shortening the maturity of funding liabilities while lengthening asset maturities.
Explanation: Greater maturity mismatch = higher funding vulnerability. A, C, D all reduce liquidity risk.
Question 26
A committed credit facility extended to a corporate customer creates which bank liquidity risk?
Select an option first.
Correct answer: B — Contingent liquidity risk — corporates typically draw down lines during market stress exactly when the bank also faces funding pressure.
Explanation: Committed lines create procyclical contingent outflows — worst at exactly the wrong time.
Question 27
The 'funds transfer price' (FTP) for liquidity is used to:
Select an option first.
Correct answer: B — Allocate the cost and value of liquidity across business units — charging those consuming liquidity and crediting those providing it.
Explanation: FTP creates correct internal incentives by making each business unit bear the true cost of liquidity it consumes.
Question 28
The 'asset encumbrance ratio' measures:
Select an option first.
Correct answer: B — The proportion of total assets pledged as collateral, reducing the pool of unencumbered assets available as a liquidity backstop.
Explanation: High encumbrance → few free assets for emergency liquidity generation.
Question 29
The '30-day stress scenario' in LCR is calibrated to:
Select an option first.
Correct answer: B — A severe combined idiosyncratic and systemic stress calibrated to the 2007-08 financial crisis.
Explanation: LCR scenario: 3-notch downgrade + deposit runoffs + wholesale funding loss + collateral haircut increases + committed facility drawdowns.
Question 30
'Payment system liquidity' refers to:
Select an option first.
Correct answer: B — The ability to meet intraday payment obligations in real-time gross settlement (RTGS) systems.
Explanation: Payment system liquidity = intraday balances needed to settle payments in RTGS without gridlock.
More free FRM topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.