Free GARP FRM Part II Liquidity and Treasury Risk Practice Questions

Practice 141 free Liquidity and Treasury Risk questions for GARP FRM Part II.

141 Questions
57 Easy
56 Medium
28 Hard
2026 Syllabus

Sample Questions

Question 1 Easy
The Basel III Net Stable Funding Ratio (NSFR) is designed primarily to:
Solution
B 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
A bank's treasury team is designing the trigger framework for its Contingency Funding Plan (CFP). Which design approach is MOST consistent with sound CFP practice?
Solution
D is correct. A well-designed CFP uses a tiered trigger architecture so that mild, moderate, and severe signals lead to progressively stronger responses. Triggers should combine market-wide indicators (term funding spreads, money-market dislocations, peer-bank stress) with idiosyncratic indicators (deposit attrition, CDS widening, downgrade watches, intraday liquidity usage) so that bank-specific and systemic stresses are both detected. This layered approach allows treasury to act early, escalate proportionally, and reserve crisis-level actions for genuine emergencies.
Question 3 Hard
A treasurer observes the following 1-year market quotes: spot EUR/USD = 1.2000 USD per EUR, 1-year USD interest rate = 4.00%, 1-year EUR interest rate = 1.00%, and 1-year FX forward = 1.2380 USD per EUR. Following the Borio et al. framework, what is the approximate cross-currency basis, and which side pays the premium?
Solution
A is correct. The CIP-implied forward is FCIP=S×(1+rUSD)/(1+rEUR)=1.2000×1.04/1.01=1.2356F^{CIP} = S \times (1 + r_{USD})/(1 + r_{EUR}) = 1.2000 \times 1.04/1.01 = 1.2356. The observed forward of 1.2380 is higher than CIP-implied. The synthetic USD rate for a EUR holder who borrows EUR and swaps into USD is (1+rEUR)×F/S−1=1.01×1.2380/1.2000−1≈4.20%(1 + r_{EUR}) \times F/S - 1 = 1.01 \times 1.2380/1.2000 - 1 \approx 4.20\%, which is roughly 20 basis points above the direct USD rate of 4.00%. The basis is therefore about 20 bps and falls on the non-USD leg: EUR-funded banks must pay this premium to obtain dollars through the FX swap market.
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