PRMIA PRM 8008 Question # 73 Topic 8 Discussion

All product pricing should reflect the cost of maintaining the liquidity required to support a product. This is regardless of the accounting treatment for the product, ie irrespective of whether the product is on or off balance sheet. Therefore statement I is incorrect.

The time horizon to consider for liquidity risk management is determined taking into account a number of factors, which include both the speed at which new sources of liquidity can be generated and any applicable regulatory requirements. Statement II is correct.

Managing collateral, both collateral received and collateral posted with counterparties, is an important aspect of liquidity risk management as liquidity problems often manifest themselves in the form of margin calls requiring collateral to be posted. Statement III is therefore correct.

The maturity period of the different sources of capital funding for a bank, for example equity capital, preferred shares, long term debt etc quite clearly has a significant impact on liquidity needs. Stable sources of funds such as equity or preferred capital, or debt that is not maturing shortly help the liquidity position. Statement IV is therefore correct.

Choice 'b' is the correct answer.