Meeting a withdrawal during a liquidity shock
Series XXI-B case study · set 2, case 6 of 6 · 5 questions · 2 marks each
Question 1 of 5Case practice
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A client portfolio is valued at ₹100 lakh: ₹10 lakh cash, ₹40 lakh in highly liquid securities and ₹50 lakh in less liquid securities. The client needs a ₹25 lakh withdrawal in two days. For this stress exercise, highly liquid securities can be sold immediately at 1% below their recorded values, while less liquid securities cannot settle in time. The manager wants to meet the withdrawal using current cash and sales of highly liquid holdings only. Ignore taxes and other costs. Values and the 1% sale discount are fixed assumptions, not predictions. The mandate permits the sale, and the manager must also disclose its cost and the reduced liquidity available after withdrawal.
All amounts and contract terms in this case are hypothetical.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A client portfolio is valued at ₹100 lakh: ₹10 lakh cash, ₹40 lakh in highly liquid securities and ₹50 lakh in less liquid securities. The client needs a ₹25 lakh withdrawal in two days. For this stress exercise, highly liquid securities can be sold immediately at 1% below their recorded values, while less liquid securities cannot settle in time. The manager wants to meet the withdrawal using current cash and sales of highly liquid holdings only. Ignore taxes and other costs. Values and the 1% sale discount are fixed assumptions, not predictions. The mandate permits the sale, and the manager must also disclose its cost and the reduced liquidity available after withdrawal.
All amounts and contract terms in this case are hypothetical.
Q1How much additional cash must be raised beyond current cash?
Option A. ₹25 lakh
Why it is wrong: This ignores current cash.
Option B. ₹15 lakh — Correct answer
Option C. ₹35 lakh
Why it is wrong: This adds existing cash to the withdrawal need.
Option D. ₹10 lakh
Why it is wrong: This is the cash already held.
Answer: B. ₹25 lakh − ₹10 lakh = ₹15 lakh. Remember: Distinguish the withdrawal amount from the cash shortfall.
Hint, shown before you answer in practice mode: Subtract usable cash from the requested withdrawal.
XXIB-S2-C06-Q1easynumerical
Q2What recorded value of liquid securities must be sold to raise that cash?
Option A. ₹25.2525 lakh
Why it is wrong: This ignores the existing cash.
Option B. ₹14.85 lakh
Why it is wrong: This applies the discount in the wrong direction.
Option C. About ₹15.1515 lakh — Correct answer
Option D. ₹15 lakh
Why it is wrong: A 1% sale discount means this would raise only ₹14.85 lakh.
Answer: C. Required recorded value = ₹15 lakh/0.99 = ₹15.151515 lakh. Remember: Solve for the amount sold after accounting for the execution haircut.
Hint, shown before you answer in practice mode: Sale proceeds equal 99% of recorded value.
XXIB-S2-C06-Q2mediumnumerical
Q3What value is lost to the sale discount?
Option A. ₹1,500
Why it is wrong: This understates the cost by about ten times.
Option B. ₹1,51,515
Why it is wrong: This overstates the cost by ten times.
Option C. ₹0
Why it is wrong: The sale price is explicitly below recorded value.
Option D. About ₹15,152 — Correct answer
Answer: D. (₹15.151515 lakh − ₹15 lakh) × 1,00,000 = about ₹15,151.52. Remember: Liquidity can have an economic execution cost.
Hint, shown before you answer in practice mode: Subtract received cash from the recorded value sold.
XXIB-S2-C06-Q3mediumnumerical
Q4What is the portfolio value remaining after the withdrawal and sale loss?
Option A. ₹49.8485 lakh
Why it is wrong: This subtracts the withdrawal twice.
Option B. ₹85 lakh
Why it is wrong: This deducts only the cash raised, not the full withdrawal.
Option C. About ₹74.8485 lakh — Correct answer
Option D. ₹75 lakh
Why it is wrong: This ignores the sale discount.
Answer: C. ₹100 lakh − ₹25 lakh − (₹15/0.99−₹15) lakh = ₹74.848485 lakh. Remember: Client withdrawals and realised trading losses are different changes in value.
Hint, shown before you answer in practice mode: Start with total value, then subtract the client withdrawal and execution loss.
XXIB-S2-C06-Q4hardnumerical
Q5What risk has become more concentrated in the remaining portfolio?
Option A. No risk changes when clients withdraw
Why it is wrong: The holdings and weights have changed.
Option B. Illiquidity, because the ₹50 lakh less liquid sleeve now forms a larger share — Correct answer
Option C. The less liquid sleeve becomes immediately saleable
Why it is wrong: Its settlement constraint has not changed.
Option D. Cash risk, because all withdrawal proceeds stay invested
Why it is wrong: The cash is paid to the client.
Answer: B. The ₹50 lakh sleeve was 50% of assets and is now roughly 66.8%. Meeting one withdrawal can worsen the liquidity profile for remaining assets. Remember: Review the residual portfolio after executing a cash request.
Hint, shown before you answer in practice mode: Compare the unchanged less liquid value with the smaller portfolio total.
XXIB-S2-C06-Q5mediumapplication
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