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?

  1. The collateral value may be overstated and stale, hiding an actual breach of the loan-to-value (LTV) covenant.
  2. The fund's ongoing use of interest rate swaps to hedge duration will increase the bank's CVA charge.
  3. The fund will suffer a classic investor 'run' as its limited partners rush to redeem all capital commitments.
  4. The bank must raise the facility's interest rate under the newly adopted Basel crypto-asset capital treatment framework.

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