Answer: The matched-maturity marginal approach is preferred because it quantifies liquidity risk premiums across all maturities.

## Explanation The **matched-maturity marginal approach** is considered the best approach for liquidity transfer pricing because: - **Accurate pricing**: It assigns specific funding costs based on the actual maturity structure of assets and liabilities - **Liquidity risk quantification**: It properly quantifies liquidity risk premiums across different maturities - **Economic reality**: It reflects the true economic cost of funding for different time horizons - **Risk management**: It helps business units understand the liquidity costs associated with their activities ### Why other options are incorrect: - **Option A (Zero cost of funds)**: This approach ignores the actual cost of funding and doesn't properly account for liquidity risk - **Option B (Pooled average cost)**: While simpler, this approach doesn't differentiate between different maturities and can misallocate costs - **Option C (Separate average cost)**: This is better than pooled average but still doesn't capture the maturity-specific liquidity premiums The matched-maturity marginal approach aligns funding costs with the actual term structure of interest rates and properly incorporates liquidity premiums, making it the most theoretically sound and practical method for liquidity transfer pricing.

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