Quiz: Liquidity and Funding Risk

Last reviewed: October 15, 2026

This is a draft, shown for review before publication.

5 questions to check your understanding of the chapter “Liquidity and Funding Risk”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.

Question 1
Which of the following describes funding liquidity risk?
1. A.The risk that a firm cannot easily sell or offset a position at the market price because the market lacks depth
2. B.The risk that a firm cannot meet expected payments or deliver the collateral it is asked for
3. C.The risk that a counterparty fails and the firm cannot collect the positive market value of its trades with that counterparty
Answer and explanation
Answer: B
Funding liquidity risk is the risk that a firm cannot meet expected or unexpected payments, or deliver the collateral it is asked for, without harming its daily operations or financial condition. In derivatives, demands for additional collateral as market values move are one of its causes.

The risk that a firm cannot easily sell or offset a position at the market price because the market lacks depth or is not working normally is market liquidity risk, which is distinguished from funding liquidity risk. Being unable to collect the positive market value of trades when a counterparty fails is counterparty credit risk. Margin plays an important role in containing that risk, but it can also raise the liquidity risk of participants that use leverage.
Learn more: Funding Variation and Initial Margin
Question 2
As a hypothetical example, a bank has an interest rate swap with a nonfinancial company and hedges it with an opposite trade of the same notional amount with a hedge counterparty bank. With that bank, it exchanges the full variation margin every day under a credit support annex (CSA), and each side also posts 200 million yen of initial margin. The trade with the company is worth 500 million yen to the bank, and the bank holds 100 million yen of cash collateral from the company. What is the total balance of cash the bank is raising?
1. A.200 million yen
2. B.400 million yen
3. C.600 million yen
4. D.700 million yen
Answer and explanation
Answer: C
The bank is raising 600 million yen. The two trades are opposite trades of the same notional amount, so their values to the bank have the same size and opposite sign, and the trade with the hedge counterparty bank is worth −500 million yen. The bank has paid 500 million yen of variation margin to the hedge counterparty bank. The part of the gain on the company trade that is not covered by collateral received does not turn into cash. The cash raised for variation margin, $F$ , is found from the value of the company trade, $V$ , and the collateral held from the company, $X$ , as $F = \max(V - X,\ 0)$ . Here $F = \max(500 - 100,\ 0) = 400$ million yen. Under the margin rules, initial margin received is held in trust or by a similar method and cannot be pledged or lent. The 200 million yen of initial margin the bank posts must be funded separately, so the total is 400 + 200 = 600 million yen.

The value 700 million yen does not deduct the 100 million yen of collateral from the company and takes $F$ as 500 million yen. The value 400 million yen assumes that the 200 million yen of initial margin received from the hedge counterparty bank can be used for the initial margin the bank posts (400 + 200 − 200). The value 200 million yen assumes that the gain on the company trade covers the variation margin payments, so it counts only the initial margin.

Suppose rates move the other way, the company trade is worth −200 million yen to the bank, and the bank holds no collateral from the company. Then $F = \max(-200 - 0,\ 0) = 0$ . In that case the bank receives variation margin from the hedge counterparty bank. If variation margin received under the CSA can be reused, the bank can use that cash for its own funding. The 200 million yen of initial margin must still be funded in this case.
Learn more: Funding Variation and Initial Margin
Question 3
According to the business rules of Japan Securities Clearing Corporation (JSCC) as of September 2026, JSCC calculates the required variation margin for interest rate swap clearing. A clearing participant that becomes the paying side of a yen trade deposits the variation margin in what form and by when?
1. A.In yen cash or Japanese government bonds, by 11:00 a.m. on the business day after the calculation date
2. B.In yen cash, by 11:00 a.m. on the business day after the calculation date
3. C.In yen cash, by 3:30 p.m. on the calculation date
4. D.In yen cash or Japanese government bonds, by 3:30 p.m. on the calculation date
Answer and explanation
Answer: B
Variation margin is deposited in yen cash by 11:00 a.m. on the business day after the calculation date. JSCC, a central counterparty, calculates the required variation margin from the change since the previous business day in the net present value of the trades being cleared, and variation margin is paid and received in cash in the currency of the trade. For yen trades, a clearing participant that pays deposits the amount by 11:00 a.m. on the next business day, and JSCC pays the receiving participant without delay from 1:30 p.m.

Intraday margin, which is part of initial margin, has a different deadline. If the initial margin a participant has deposited falls short of the required intraday margin, it deposits the shortfall by 3:30 p.m. on the calculation date. Intraday margin can also be deposited in Japanese government bonds, but variation margin can be paid only in cash in the currency of the trade. A participant therefore needs yen cash to pay variation margin even if it holds Japanese government bonds. Conversely, if values move in the participant's favor and it becomes the receiving side, it receives variation margin in cash from JSCC.
Learn more: Handling Margin Calls
Question 4
As a hypothetical example, a company posts Japanese government bonds (JGBs) it already holds to provide 9.8 billion yen of required collateral value. The haircut on the JGBs is 2%. If the company did not post them, it would have used the full market value of the JGBs in a repo to borrow cash at 0.3% a year, and used that cash to repay the same amount of unsecured borrowing at 1.0% a year. Assuming rates stay unchanged for a year, how much interest differential does the company give up in a year by posting the JGBs?
1. A.30 million yen
2. B.68.6 million yen
3. C.100 million yen
4. D.70 million yen
Answer and explanation
Answer: D
The amount given up is 70 million yen. The value of non-cash collateral is its market value minus the market value multiplied by the haircut. Because of the haircut, the market value of the JGBs to post is 9.8 ÷ (1 − 0.02) = 10 billion yen. Had the company put these 10 billion yen into a repo, it could have borrowed 10 billion yen of cash at 0.3% a year and cut its unsecured borrowing at 1.0% a year by 10 billion yen. The interest differential is 0.7% a year, so 10 × (1.0% − 0.3%) = 70 million yen.

The value 30 million yen counts only the repo interest on 10 billion yen (10 × 0.3%). The value 100 million yen counts only the interest on the unsecured borrowing (10 × 1.0%). The value 68.6 million yen is calculated on the required collateral value of 9.8 billion yen without considering the haircut (9.8 × 0.7%). What can no longer be used in the repo is not the collateral value but the market value of the JGBs posted, 10 billion yen.

If the company had no other use for the JGBs, it would give up nothing and this cost would be 0. Which asset is cheaper to post depends on how the asset could otherwise be used. This does not recommend any particular method.
Learn more: Sourcing and Substituting Collateral
Question 5
As a hypothetical example, a bank has entered into two netting agreements, S1 and S2. S1 has a market value of +30 billion yen, and the bank has received 25 billion yen of variation margin in cash. S2 has a market value of −20 billion yen, and the bank has posted 15 billion yen in cash. It has deposited 10 billion yen of initial margin, and the variation margin it has received is segregated. Under the Financial Services Agency's liquidity notice as of October 2026, what is the required stable funding for derivatives in the net stable funding ratio (NSFR)?
1. A.34.5 billion yen
2. B.9.5 billion yen
3. C.26 billion yen
4. D.33.5 billion yen
Answer and explanation
Answer: A
The required stable funding is 34.5 billion yen. The factors are 100% on the excess of derivative assets over liabilities, 5% on the replacement cost of liabilities (the sum of negative replacement costs before deducting variation margin), and 85% on initial margin deposited. Segregated variation margin does not meet the conditions for deducting it from the amount of derivative assets, so derivative assets are 30 billion yen. Derivative liabilities are 20 − 15 = 5 billion yen after deducting the 15 billion yen of variation margin posted in cash. The excess of assets over liabilities is 30 − 5 = 25 billion yen, which at 100% is 25 billion yen. Add 5% of the 20 billion yen replacement cost of liabilities, which is 1 billion yen, and 85% of the 10 billion yen of initial margin, which is 8.5 billion yen. The total is 25 + 1 + 8.5 = 34.5 billion yen.

The value 9.5 billion yen assumes the received variation margin meets the conditions, so 25 billion yen is deducted from assets (assets 5 and liabilities 5 give a difference of 0, and 0 + 1 + 8.5). That happens when all four conditions are met, including that the variation margin is not segregated and that the amount received is at least the marked-to-market amount. The value 26 billion yen omits the 8.5 billion yen for initial margin (25 + 1). The value 33.5 billion yen omits the 1 billion yen for the replacement cost of liabilities (25 + 8.5).
Learn more: Derivatives in LCR and NSFR

Question 1

Question 2

Question 3

Question 4

Question 5