Explanation:
Statement D is the least accurate. In liquidity and asset-liability management (ALM), the Term Structure of Expected Cash Flows (TSECF) fundamentally includes the expected cash flows from all current contracts that comprise the existing assets and liabilities on the balance sheet.
Therefore, statement D directly contradicts the definition and purpose of TSECF.
Statement A is accurate as behavioral models are required to estimate cash flows for products containing embedded liquidity options (e.g., prepayments or deposit withdrawals). Statement B is accurate because existing contract cash flows are central to TSECF, and they can be stochastic when linked to floating market rates. Statement C is also a consideration in forward-looking cash flow projections where new business is modeled stochastically.
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Q.3930 Which of the following statements is least accurate about TSECF based on financial risk management?
A
In TSECF, cash flows are adjusted to include liquidity options, and thus behavioral models are used for typical banking products such as sight deposits, prepaying mortgages, and credit link usage.
B
TSECF includes the cash flows from all current contracts that include the assets and liabilities. Cash flows are stochastic in many cases because they link to market indices, such as Libor or Euribor fixings.
C
Cash flows originated by new business increasing the assets are included; they are typically stochastic in both the amount and time dimensions, so they are treated employing models that consider all related risks.
D
TSECF does not include the cash flows from all current contracts that include the assets and liabilities.
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