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 $100 m 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 ongoing use of interest rate swaps to hedge duration will increase the bank's CVA charge.
- The fund will suffer a classic investor 'run' as its limited partners rush to redeem all capital commitments.
- The bank must raise the facility's interest rate under the newly adopted Basel crypto-asset capital treatment framework.
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