Explanation

Correct Answer: D

Stress tests and Contingent Funding Plans (CFPs) are complementary components in a comprehensive liquidity risk management framework:

• Stress tests identify potential vulnerabilities by simulating adverse scenarios and assessing their impact on the institution's liquidity position
• CFPs build upon stress test results by outlining specific, actionable steps to address identified funding shortfalls during crisis situations

Why other options are incorrect:

• A: Stress tests are not exclusively part of the CFP; they serve broader risk assessment purposes beyond just determining funding requirements
• B: A CFP does not eliminate the need for stress tests; rather, it relies on stress test results to be effective
• C: Stress tests and CFPs are not independent; they work together in a coordinated risk management approach

Key Relationship: Stress tests provide the analytical foundation (scenarios and vulnerability identification) that informs the development and implementation of CFPs, which in turn provide the operational response framework for addressing potential funding shortages identified through stress testing.