2016-FRR VCE Exam Download

I. The static model gives a liquidity estimate only after the bank faces the liquidity problem:

This statement is true because the static liquidity ladder model does not predict future liquidity needs, it only assesses current liquidity status.

II. The static model can only make projections over a few days:

This statement is true as static models are typically used for short-term liquidity assessment.

III. The static model does not incorporate uncertainty in the analysis:

This statement is true because the static model does not consider the variability or uncertainty in future cash flows or obligations.

Therefore, all the statements I, II, and III are correct about the shortfalls of the static liquidity ladder model.

Comprehensive and Detailed In-Depth Explanation:

Mark-to-market (MtM) involves valuing positions at current market prices daily, primarily for the trading book (e.g., securities, derivatives). Option C—obtaining and verifying market prices for trading book instruments—is the core MtM activity under Basel III’s market risk rules. Option A applies to the banking book (not typically MtM), Option B describes settlement, and Option D is a profitability analysis, not MtM.

Exact Extract from Official Source:

BCBS, "Basel III: A Global Regulatory Framework," December 2010, para. 688: "Mark-to-market requires banks to obtain current market prices and verify them daily for all trading book positions to reflect fair value."

GARP FRR Study Notes, Market Risk Section: "The MtM process entails collecting and validating market prices for trading book instruments to determine their current value."

Identify the variables:

Haircut in a repo transaction: 20%

This implies that the lender will provide cash equivalent to 80% of the value of the collateral (CDOs in this case).

Calculate the maximum leverage factor:

The leverage factor can be calculated as the reciprocal of the proportion of the value after the haircut.

Leverage factor=1Haircut percentageLeverage factor=Haircut percentage1​

Given a 20% haircut, the calculation is:

Leverage factor=10.20=5Leverage factor=0.201​=5

However, in practice, leverage is often cited with respect to the additional amount borrowed relative to the initial equity. Thus, the effective leverage factor here is:

Leverage factor=10.20−1=4Leverage factor=0.201​−1=4

The PVBP (Present Value of a Basis Point) can be calculated by taking the change in the bond's price and dividing it by the change in yield (expressed in basis points). Here, the bond's price drops from $1,000 to $976 when the yield increases from 4.7% to 4.71%, which is a 1 basis point increase. The change in price is $1,000 - $976 = $24. Therefore, the PVBP is $24 / 1 = $24.