medium · Frm Part 2 Current Issues
A bank provides a 'NAV facility' to a private equity fund. If the fund's underlying assets are marked at $100m but are illiquid and exhibit 'volatility laundering', what is the primary risk to the bank as the lender?
- The collateral value may be overstated and stale, hiding an actual breach of the loan-to-value (LTV) covenant.
- The fund's use of interest rate swaps will increase the bank's CVA charge.
- The fund will experience a 'run' as investors withdraw their demand deposits.
- The bank will be forced to increase the interest rate on the facility due to the Basel crypto rules.
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