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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 271
The 'Asset-Liability Committee' (ALCO) is responsible for:
Select an option first.
Correct answer: B — Setting and monitoring the overall balance sheet strategy, IRRBB position, liquidity, and funding — translating risk appetite into operational limits.
Explanation: ALCO = governance body for banking book. Sets NII/EVE limits, approves funding plan, monitors IRRBB and liquidity.
Question 272
The 'funds transfer pricing' (FTP) framework serves to:
Select an option first.
Correct answer: B — Allocate the cost and benefit of liquidity between treasury and business units — creating correct incentives by charging units for liquidity consumed and crediting those providing it.
Explanation: FTP: treasury buys deposits, sells funding at internal transfer prices reflecting true market cost.
Question 273
A bank with more short-term liabilities than assets has:
Select an option first.
Correct answer: B — A negative repricing gap — RSL > RSA, so a rate rise reduces NII (liabilities reprice up faster).
Explanation: Negative gap: when rates rise, liability costs increase faster than asset yields → NII falls.
Question 274
The primary role of a bank's Treasury Department is:
Select an option first.
Correct answer: B — Managing internal funding, balance sheet IRRBB, liquidity, and capital — the internal financial hub funding business units.
Explanation: Treasury: funds business units via FTP, manages IRRBB/liquidity, issues debt/equity, manages HQLA portfolio.
Question 275
'Interest Rate Risk in the Banking Book' (IRRBB) refers to:
Select an option first.
Correct answer: B — Risk to NII and EVE arising from interest rate changes on banking book assets, liabilities, and OBS positions.
Explanation: IRRBB (BCBS 368): two perspectives — NII (short-term income) and EVE (long-term balance sheet value).
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Question 276
Economic Value of Equity (EVE) is calculated as:
Select an option first.
Correct answer: B — PV of all expected asset cash flows minus PV of all expected liability cash flows.
Explanation: EVE = PV(Assets) − PV(Liabilities) = NPV of the bank's balance sheet.
Question 277
'Income simulation' for IRRBB assesses:
Select an option first.
Correct answer: B — How NII changes over 1-3 years under different rate scenarios — the short-term income perspective.
Explanation: Income simulation: forward NII projection under rate scenarios. Complements EVE analysis.
Question 278
A bank holds fixed-rate mortgages funded by variable-rate deposits. When rates rise:
Select an option first.
Correct answer: B — NIM declines — funding cost rises immediately while fixed-rate mortgage income remains unchanged.
Explanation: Classic NIM compression: fixed assets locked in, variable liabilities reprice upward → spread compresses.
Question 279
'Basis risk' in IRRBB refers to:
Select an option first.
Correct answer: B — Risk that assets and liabilities indexed to different reference rates (e.g., SOFR vs Prime) do not move in lockstep — creating residual rate risk even in an apparently matched book.
Explanation: Basis risk: SOFR-indexed assets + Prime-indexed liabilities appear hedged but the spread between rates can change.
Question 280
The 'delta equivalent' method in rate risk converts instruments to:
Select an option first.
Correct answer: B — Equivalent positions in standard zero-coupon bonds at different maturities for consistent risk measurement across all fixed-income instruments.
Explanation: Delta/sensitivity mapping: complex instruments mapped to standard maturity points on the yield curve.
Question 281
Basel IRRBB standardised EVE shocks include which scenarios?
Select an option first.
Correct answer: B — Six standardised scenarios: parallel up (+200bp), parallel down (−150bp), steepener, flattener, short-rate shock up, short-rate shock down.
Explanation: BCBS 368: six standardised shocks for EVE calculation. All six must be computed.
Question 282
Interest rate swaps allow banks to synthetically convert:
Select an option first.
Correct answer: B — Fixed-rate positions to floating-rate (or vice versa) — adjusting repricing profile without restructuring customer products.
Explanation: IRS = primary IRRBB management tool. Receive-fixed converts floating funding to fixed; pay-fixed converts fixed assets to floating.
Question 283
The 'bank investment portfolio' (AFS/HTM) is managed by treasury to:
Select an option first.
Correct answer: B — Provide a secondary liquidity reserve, earn carry on excess liquidity, and manage the bank's overall interest rate risk profile.
Explanation: Investment portfolio: secondary HQLA, carry income, and IRRBB management via duration adjustment.
Question 284
'Prepayment risk' on a fixed-rate mortgage portfolio creates IRRBB because:
Select an option first.
Correct answer: B — When rates fall, borrowers refinance early — the effective asset duration shortens unexpectedly, disrupting duration hedges and forcing reinvestment at lower rates.
Explanation: Negative convexity: prepayments accelerate when rates fall → duration shortens → EVE benefit less than expected.
Question 285
The 'repricing gap report' for each time bucket shows:
Select an option first.
Correct answer: B — Difference between rate-sensitive assets and liabilities within each period — indicating NII sensitivity to rate changes.
Explanation: Repricing gap = RSA − RSL per bucket. Positive gap: rising rates boost NII. Negative gap: rising rates hurt NII.
Question 286
A 'parallel yield curve shift' assumption in IRRBB understates risk because:
Select an option first.
Correct answer: B — Real curves twist — short and long rates often move by different amounts. Parallel shift misses risk for banks concentrated in specific maturity segments.
Explanation: Non-parallel shifts: 2022 US rate cycle saw dramatic short-end hikes with less long-end movement initially.
Question 287
The difference between 'accrual' and 'economic value' perspectives in IRRBB:
Select an option first.
Correct answer: B — Accrual (NII): short-term earnings impact over 1-3 years; Economic value (EVE): long-term NPV impact of all future cash flows. Both needed for complete IRRBB picture.
Explanation: Dual perspectives complement each other: NII = what will the bank earn? EVE = what is the bank worth?
Question 288
'Option risk' in the banking book arises from:
Select an option first.
Correct answer: B — Embedded options in banking products — borrower prepayment rights, depositor early withdrawal, committed line drawdowns — creating asymmetric rate sensitivities.
Explanation: Embedded options: behavioural (customer-driven) and automatic (contractual) create non-linear IRRBB.
Question 289
Behavioural modelling of non-maturity deposits (NMDs) is necessary because:
Select an option first.
Correct answer: B — Customers' actual withdrawal behaviour is rate-sensitive and habitual — statistical modelling determines the 'stable core' and effective maturity different from the legal overnight term.
Explanation: NMD modelling: core (stable, long effective maturity) vs volatile (transient, short). Critical for both IRRBB and NSFR.
Question 290
The Basel IRRBB 'outlier test' is triggered when:
Select an option first.
Correct answer: B — The EVE decline under any standardised shock exceeds 15% of Tier 1 + Tier 2 capital — supervisors may impose a Pillar 2 capital add-on.
Explanation: Outlier test threshold: |ΔEVE| > 15% of total regulatory capital triggers supervisory review and potential Pillar 2 capital.
Question 291
The 'cost of carry' for the HQLA portfolio refers to:
Select an option first.
Correct answer: B — The yield forgone by holding low-yielding liquid assets (HQLA) instead of higher-yielding illiquid assets — the economic cost of maintaining the liquidity buffer.
Explanation: Cost of carry = foregone yield spread. This is a real cost that FTP should allocate to business lines to create correct incentives.
Question 292
FTP for a 5-year fixed-rate mortgage would typically be set at:
Select an option first.
Correct answer: B — The 5-year market funding cost (interpolated from swap curve) plus a liquidity premium — locking in the true cost for the mortgage duration.
Explanation: FTP for fixed mortgages: 5-year swap rate + liquidity premium. This isolates the lending margin and hedges the duration risk centrally.
Question 293
'Pillar 2 IRRBB' capital requirements address:
Select an option first.
Correct answer: B — Pillar 1 has no standardised IRRBB capital charge — Pillar 2 requires supervisors to ensure adequate capital through ICAAP review and potential Pillar 2 add-ons.
Explanation: IRRBB is a Pillar 2 risk. Banks calculate internally; supervisors assess via SREP/ICAAP.
Question 294
A mismatch between USD assets and EUR liabilities creates which ALM risk:
Select an option first.
Correct answer: B — Structural foreign exchange risk — an open currency position creating P&L sensitivity to EUR/USD movements.
Explanation: Structural FX risk: managed through cross-currency swaps, FX forwards, or natural hedging.
Question 295
The ALCO's 'funding plan' specifies:
Select an option first.
Correct answer: B — The planned issuance, maturity profile, and diversification of funding sources for the year — ensuring the bank can meet balance sheet growth at acceptable cost and risk.
Explanation: Funding plan: wholesale issuance calendar, deposit targets, secured funding strategy, maturity profile management.
Question 296
A bank has asset duration 4.5yr, liability duration 2.0yr, assets €100bn, liabilities €90bn. The duration gap is approximately:
Select an option first.
Correct answer: B — 2.7 years
Explanation: Duration gap = 4.5 − (90/100)×2.0 = 4.5 − 1.8 = 2.7yr. Positive gap → rising rates reduce EVE.
Question 297
A bank shows NII +€50m for +100bp but NII −€60m for −100bp. This asymmetry suggests:
Select an option first.
Correct answer: B — Embedded deposit rate floors at 0% — when rates fall below zero, deposit rates can't be cut further, creating more NII loss than gain from equivalent rate rises.
Explanation: Asymmetric NII: deposit rate floors (0%) prevent full pass-through when rates fall below zero.
Question 298
In FTP, a branch gathering 5-year term deposits at 3% when the 5-year swap rate is 4.5% earns an FTP credit of:
Select an option first.
Correct answer: B — 1.5% on the deposit balance — the branch saved treasury 150bp versus market cost of equivalent-duration funding.
Explanation: FTP credit = market rate minus deposit rate = 4.5% − 3% = 1.5%. The branch created a funding benefit for treasury.
Question 299
A pay-fixed/receive-floating swap hedges a fixed-rate loan book because:
Select an option first.
Correct answer: B — The swap converts fixed-rate loan income to floating — so when rates rise, both the swap receipt and reinvestment income increase, making overall NII neutral to rate changes.
Explanation: Pay-fixed/receive-floating on fixed-rate loan: the combined position earns floating income → NII approximately neutral to rate shifts.
Question 300
A bank has ΔEVE = −€800m with capital of €5bn. Under Basel IRRBB, is this an outlier?
Select an option first.
Correct answer: B — Yes — €800m/€5bn = 16% > 15% threshold. The bank is an outlier requiring supervisory attention.
Explanation: Outlier test: 800/5000 = 16% > 15% threshold → outlier bank → supervisor review → potential Pillar 2 capital.
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