Learning objectives: Distinguish between deterministic and stochastic cash flows and provide examples of each. Describe and provide examples of liquidity options and explain the impact of liquidity options on a bank’s liquidity position and its liquidity management process. Define liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, cash flow at risk. Interpret the term structure of expected cash flows and cumulative cash flows. Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.
Questions:
20.9.1. Geofinancial Bank currently has the following (very) simplified balance sheet:
Further, the maturities of these accounts are as follows:
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Which term structure of expected cash flows is accurate for Geofinancial Bank?
a. Series A
b. Series B
c. Series C
d. Series D
20.9.2. Which of the following best describes the term structure of expected liquidity, TSL(e)?
a. TLS(e) is the cumulative change in the term structure of available assets (TSAA)
b. TLS(e) is a combination of the term structures of cash flow at risk (CFaR) and liquidity at risk (LaR)
c. TLS(e) is a combination of the term structure of expected cash (TSEC), change in working capital (CIWC), and change in deposits (CID)
d. TLS(e) is a combination of the term structures of cumulative expected cash flows (TSECCF) and liquidity generation capacity (TSCLGC)
20.9.3. Consider the following four definitions related to liquidity risk:
a. Liquidity risk is inaccurate, but the other three are correct
b. Funding cost risk is inaccurate, but the other three are correct
c. Cash risk at Risk (CFaR) is inaccurate, but the other three are correct
d. All four definitions are correct
Answers here:
Questions:
20.9.1. Geofinancial Bank currently has the following (very) simplified balance sheet:
Further, the maturities of these accounts are as follows:
- Assets: The bonds ($30.0 million) expire in one year. In regard to the loans ($70.0), $40.0 million expire in five (5) years, $10.0 million expire in seven (7) years, and $20.0 million expire in ten (10) years.
- Liabilities: In regard to the deposits ($20.0 million), $10.0 million expire in one (1) year, and $20.0 million expire in two (2) years. In regard to the bonds ($50.0 million), $10.0 million expire in five (5) years, $30.0 million expire in seven (7) years, and $10.0 million expire in beyond ten (>10) years.
- Equity ($20.0 million) is presumed to expire in ten (10) years
Which term structure of expected cash flows is accurate for Geofinancial Bank?
a. Series A
b. Series B
c. Series C
d. Series D
20.9.2. Which of the following best describes the term structure of expected liquidity, TSL(e)?
a. TLS(e) is the cumulative change in the term structure of available assets (TSAA)
b. TLS(e) is a combination of the term structures of cash flow at risk (CFaR) and liquidity at risk (LaR)
c. TLS(e) is a combination of the term structure of expected cash (TSEC), change in working capital (CIWC), and change in deposits (CID)
d. TLS(e) is a combination of the term structures of cumulative expected cash flows (TSECCF) and liquidity generation capacity (TSCLGC)
20.9.3. Consider the following four definitions related to liquidity risk:
- Liquidity risk: The event that in the future the bank receives smaller than expected amounts of cash flows to meet its payment obligations.
- Funding cost risk: The event that in the future the bank has to pay greater than expected cost (spread) above the risk-free rate to receive funds from sources of liquidity that are available
- Liquidity generation capacity: The ability of a bank to generate positive cash flows, beyond contractual ones, from the sources of liquidity available in the balance sheet and off the balance sheet at a given date.
- Cash flow at Risk (CFaR): The amount of economic losses due to the fact that on a given date the algebraic sum of positive and negative cash flows and of existing cash available at that date, is different from some (desired) expected level.
a. Liquidity risk is inaccurate, but the other three are correct
b. Funding cost risk is inaccurate, but the other three are correct
c. Cash risk at Risk (CFaR) is inaccurate, but the other three are correct
d. All four definitions are correct
Answers here:
