Liquidity monitoring asks when cash enters or leaves, how much moves, and what the bank can do if the forecast proves wrong. A profitable transaction can create a funding problem if its receipts arrive after its payments. Conversely, a large expected payment need not be risky when its timing, amount and funding are already secured.
A deterministic cash flow has a known amount and date under the stated assumptions. Examples include repayment of a fixed-rate borrowing and a scheduled bond coupon when default is excluded. A stochastic cash flow has uncertainty in its amount, timing, or both. Deposit withdrawals, loan prepayments and margin calls depend on customer behavior or market conditions. A floating-rate coupon has a scheduled date but an amount that may not yet be fixed.
Contractual does not always mean deterministic. A committed credit line is a contract, but the customer's decision to draw determines the cash flow. A contractual loan payment is also uncertain when default or prepayment is possible.
Common mistakes
- Calling contractual flows certain. An embedded withdrawal or draw right makes timing or amount stochastic.
- Using the wrong CFaR sign. In Example 1 the reading's signed downside measure is negative $12M; its positive shortfall magnitude is $12M.
- Adding the same capacity twice. A sale and repo on the same asset are competing uses, and a drawn line is no longer wholly undrawn.
Bottom line
- Forecast cash-flow amounts and dates separately; contractual options make both uncertain.
- Funding quantity and funding cost are distinct risks.
- Generation capacity must be executable by the required date, currency and entity.
- Asset transactions change future flows and consume available capacity.
Exam shortcut
Write the cash-flow sign convention before selecting a quantile. Then distinguish deviation from the mean from a deficit relative to zero cash. For funding actions, cross out any resource already pledged, used or unavailable before the deadline.
The full lesson (about 3,105 words, 21 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
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