Free GARP FRM Part II Liquidity and Treasury Risk Practice Questions
Liquidity and Treasury Risk Measurement and Management carries 15% of GARP FRM Part II (GARP). Questions test liquidity and leverage, early warning indicators, the bank investment function and reserves management, intraday liquidity, liquidity stress testing and contingency funding plans, non-deposit liabilities and repo financing, liquidity transfer pricing, the failure mechanics of dealer banks, and the dollar funding and covered interest parity readings.
165 questions57 easy63 medium45 hard2026 syllabus
Sample Questions
Question 1
Easy
The Basel III Net Stable Funding Ratio (NSFR) is designed primarily to:
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Correct Answer: A
Solution
A is correct. The NSFR equals Available Stable Funding (ASF) divided by Required Stable Funding (RSF) and must be at least 100%. ASF weights liability and equity sources by their stability over a one-year horizon, while RSF weights assets and off-balance-sheet items by their liquidity characteristics. The ratio's purpose is to ensure that long-dated, illiquid assets are funded with reasonably stable liabilities over a one-year period, addressing structural maturity mismatches that the LCR's 30-day horizon does not capture.
Question 2
Medium
The three-month EUR/USD cross-currency basis is -40 basis points. Which of the following institutions is positioned to earn the basis rather than pay it?
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Correct Answer: D
Solution
D is correct. A negative basis means dollars obtained through the swap market are expensive relative to the direct dollar rate, so the party supplying dollars into the swap market earns the premium and every party seeking dollars pays it. A dollar-rich lender that delivers dollars spot, holds euros over the term and takes the dollars back at the forward rate earns the dollar benchmark rate plus roughly the 40 basis point basis, on a trade that is collateralized by the currency it holds. The other three institutions are all synthetic dollar borrowers: the bank funding dollar assets, the insurer hedging a dollar portfolio home, and the issuer swapping euro proceeds into dollars all sit on the demand side that Borio, McCauley, McGuire and Sushko (2016) identify as the source of the persistent negative basis.
Question 3
Hard
The EUR/USD basis has persisted for years even though capturing it is close to a riskless trade for a bank with surplus dollars. Which development would be most likely to compress the magnitude of the basis toward zero?
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Correct Answer: A
Solution
A is correct. The basis is a price that persists because the arbitrage that would remove it consumes scarce balance sheet, capital and counterparty limits. Anything that raises the quantity of intermediation supplied at a given deviation, or lowers the cost of the leverage exposure the trade creates, allows arbitrageurs to absorb more of the standing demand for dollars and compresses the deviation. Conversely, when balance sheet becomes scarcer, as at reporting dates, the deviation widens. Interest rate levels and differentials are not candidates: both enter symmetrically into covered interest parity and are already impounded in the forward points.
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