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PRMIA Exam 8008 Topic 1 Question 29 Discussion

Actual exam question for PRMIA's Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP ? 2015 Edition exam
Question #: 29
Topic #: 1
[All Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP ? 2015 Edition Questions]

Which of the following are measures of liquidity risk

I,Liquidity Coverage Ratio

II,Net Stable Funding Ratio

III,Book Value to Share Price

IV. Earnings Per Share

Show Suggested Answer Hide Answer
Suggested Answer: B

In December 2009 the BIS came out with a new consultative document on liquidity risk. Given the events of 2007 - 2009, it has been clear that a key characteristic of the financial crisis was the inaccurate and ineffective

management of liquidity risk

The paper two separate but complementary objectives in respect of liquidity risk management: The first objective relates to the short-term liquidity risk profile of institution, and the second objective is to promote resiliency over longer-term time horizons. The paper identifies the following two ratios - you should be aware of these - though I am not sure if these will show up in the PRMIA exam:

1. Liquidity Coverage Ratio addresses the ability of an institution to survive an acute liquidity risk stress scenario lasting one month. It is calculated as follows:

Liquidity Coverage Ratio = Stock of high quality liquid assets/Net cash outflows over a 30-day time period

2. Net Stable Funding Ratio has been developed to capture structural issues related to funding choices.

Net Stable Funding Ratio = Available amount of stable funding/Required amount of stable funding

Both ratios should be equal to or greater than 1. The statement contains detailed definitions of what is included or excluded from each of the terms used in the calculations for each of the ratios. In addition, the standard also describes the what the 'acute' scenario should include (things such as a 3 notch credit downgrade, reduction in retail deposits etc)

Therefore Choice 'b' is the correct answer. Book Value to Share Price and Earnings Per Share are accounting measures unrelated to liquidity.


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