Question 1

How does the Net Stable Funding Ratio (NSFR) work and how does it complement the LCR?

AcadiFi · Accepted Answer

The NSFR promotes stable long-term funding by requiring banks to fund their activities with sufficiently stable sources over a one-year horizon. While the LCR prevents short-term liquidity crises, the NSFR prevents the structural mismatches that cause them.

Question 2

What is intraday liquidity risk and how do the BCBS monitoring tools address it?

AcadiFi · Accepted Answer

Intraday liquidity risk is the risk that a bank cannot meet its payment and settlement obligations throughout the business day. The BCBS prescribed seven monitoring tools to help supervisors assess banks' intraday liquidity management.

Question 3

What should a contingency funding plan include and how are escalation triggers designed?

AcadiFi · Accepted Answer

A Contingency Funding Plan is a predefined action plan activated during liquidity stress. It includes governance structures, early warning indicators, staged escalation frameworks, and quantified action menus for each stage of deterioration.

Question 4

What are the unique challenges in measuring hedge fund risk and how do standard risk metrics fail?

AcadiFi · Accepted Answer

Hedge fund risk measurement is challenging because hedge fund return distributions violate many assumptions underlying standard risk metrics. Non-normal distributions, stale pricing, leverage distortion, and option-like payoffs all cause standard measures to understate true risk.

Question 5

How do you measure risk in private equity funds, and why are standard portfolio metrics inadequate?

AcadiFi · Accepted Answer

Private equity risk measurement is challenging due to illiquidity, smoothed valuations, and the J-curve pattern. Standard metrics like volatility, Sharpe ratio, and correlation are systematically biased when applied to PE, overstating its risk-adjusted appeal.

Question 6

What are the key risks in structured credit products like CDOs and how does tranching affect the risk profile?

AcadiFi · Accepted Answer

Structured credit products like CDOs pool exposures and redistribute risk through a waterfall structure. Tranching doesn't reduce total risk — it concentrates and redistributes it, making correlation assumptions critical to valuation.

Question 7

How does risk budgeting work in portfolio construction and what are its practical applications?

AcadiFi · Accepted Answer

Risk budgeting allocates a total risk budget across portfolio components, ensuring each position contributes the intended amount of risk. Unlike traditional return-based approaches, risk budgeting starts with risk and distributes risk-taking capacity intentionally.

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