Explanation:
B is correct. Clients can serve as sources of intraday liquidity and enable the conversion of liquid assets such as US Treasury bills to cash. One example of this is a repo transaction.
A is incorrect. Intraday overdrafts occur frequently and the bank can borrow federal funds on an intraday basis and receive the funds almost immediately.
C is incorrect. The balance of liquid assets held in the investment portfolio tends to have low volatility and is therefore easy to predict.
D is incorrect. Funding of nostro accounts is not initiated by clients entering into loans or repo transactions. Instead, this describes the process banks use to manage the cash they place in correspondent banking accounts.
Learning Objective: Identify and explain the uses and sources of intraday liquidity.
Reference: Shyam Venkat, Stephen Baird, Liquidity Risk Management: A Practitioner’s Perspective (Hoboken, NJ: John Wiley & Sons, 2016). Chapter 4. Intraday Liquidity Risk Management
Ultimate access to all questions.
No comments yet.
A
Intraday overdrafts of liquidity are prohibited by regulators, but the bank can borrow from the Federal Reserve before the opening of business each day to resolve expected liquidity needs.
B
The bank’s clients can serve as a source of intraday liquidity, which allows the bank to convert liquid assets such as US Treasury bills to cash.
C
The balance of money market assets held in the bank’s investment portfolio will tend to be relatively volatile and is therefore difficult to forecast on any given day.
D
Funding of nostro accounts at correspondent banks is typically initiated by clients entering into loans or repo transactions.