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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 391
An ALCO 'strategic scenario analysis' differs from regulatory IRRBB stress tests in that:
Select an option first.
Correct answer: B — Strategic scenarios are forward-looking and incorporate management actions, new business projections, and competitive dynamics — whereas regulatory scenarios are standardised shocks applied to the static balance sheet.
Explanation: Strategic vs regulatory IRRBB scenarios: (1) strategic = dynamic balance sheet, management actions included; (2) regulatory = static balance sheet, standardised shocks, no management actions. Both are needed for complete IRRBB management.
Question 392
The 'liquidity implication of paying a large dividend or share buyback' for a bank's treasury is:
Select an option first.
Correct answer: B — Dividends and buybacks consume cash — reducing the HQLA buffer immediately and potentially requiring pre-funding through bond issuance or reduced HQLA to maintain the liquidity ratio after distribution.
Explanation: Dividend/buyback liquidity impact: cash distributions reduce HQLA. ALCO must coordinate with capital planning to ensure distributions are funded without breaching liquidity risk appetite.
Question 393
The 'asset swap spread' on a bank bond in ALM analysis reflects:
Select an option first.
Correct answer: A — The bank's credit risk premium over the risk-free rate — what investors require to hold the bank's bonds.
Explanation: Asset swap spread = credit spread = compensation for holding bank credit risk instead of risk-free instrument. Used in FTP as the bank's funding spread component.
Question 394
A bank uses 'cash flow hedging' accounting for interest rate swaps in its ALM book. The primary accounting benefit is:
Select an option first.
Correct answer: A — The hedge gain/loss goes directly to equity (OCI) rather than immediately through P&L — reducing reported earnings volatility from hedging activities.
Explanation: Cash flow hedge accounting: changes in fair value of the hedging instrument go to OCI (equity) rather than P&L, as long as the hedge is effective. This reduces P&L volatility from hedging. A is correct; B, C, D are wrong.
Question 395
The 'fair value hedging' accounting for IRRBB swaps means:
Select an option first.
Correct answer: B — Both the hedging instrument (swap) and the hedged item (bond/loan) are measured at fair value — changes in both flow through P&L, with the net (hedge ineffectiveness) being the only P&L impact if the hedge is effective.
Explanation: Fair value hedge accounting: hedged item + hedging derivative both at fair value through P&L. If hedge is effective (changes offset), net P&L impact ≈ 0. Used when hedging fixed-rate assets/liabilities.
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Question 396
The 'IRRBB audit' conducted by internal audit as part of the third line of defence reviews:
Select an option first.
Correct answer: B — Whether IRRBB policies are correctly implemented, whether risk limits are enforced, whether model governance is adequate, and whether ALCO oversight is effective — providing independent assurance to the board.
Explanation: IRRBB internal audit: third-line review covers policy implementation, limit compliance, model governance, data quality, hedging documentation, and ALCO governance.
Question 397
The 'term premium' embedded in the yield curve represents:
Select an option first.
Correct answer: B — The additional yield investors require for committing to a longer-term investment versus rolling short-term investments — this premium is a key component of the FTP for long-term funding.
Explanation: Term premium: compensation for: (1) inflation uncertainty over long horizon; (2) liquidity risk of committing for longer; (3) supply/demand imbalances. Key input to the FTP liquidity premium.
Question 398
A bank's ALCO decides to 'actively manage the structural FX position' rather than fully hedge it. The primary reason might be:
Select an option first.
Correct answer: B — A deliberate risk-taking decision — the bank believes the foreign currency will appreciate, creating a capital gain on the structural position that outweighs the FX risk.
Explanation: Active structural FX management: some banks take deliberate views on currency movements and partially hedge structural FX. This is a risk-taking decision that must be within the approved FX risk appetite.
Question 399
In the context of ALM, 'net interest income optimisation' must balance which competing objectives:
Select an option first.
Correct answer: B — Maximising NIM and protecting NII from rate volatility versus maintaining adequate liquidity (LCR/NSFR), managing IRRBB within risk appetite, and ensuring capital adequacy — all simultaneously.
Explanation: NII optimisation: ALCO must balance multiple competing objectives — profitability (NIM/ROE), risk (IRRBB/liquidity within appetite), regulatory compliance (capital/LCR/NSFR), and business strategy. No single objective can be maximised in isolation.
Question 400
The concept of 'liquidity adjusted duration' extends the standard Macaulay duration by:
Select an option first.
Correct answer: B — Adjusting the duration calculation to reflect the fact that some cash flows may not occur at their scheduled dates due to prepayment or early withdrawal optionality — producing a more realistic measure of actual interest rate sensitivity.
Explanation: Liquidity-adjusted (behavioural) duration: modifies standard duration using behavioural cash flows (prepayment-adjusted mortgages, NMD effective maturities) rather than contractual cash flows. More accurate for banking book IRRBB.
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