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1. (Liquidity Management during Deposit Drain) A DI with the following balance sheet (in millions) expects a net deposit drain of $10 million. Assume that
1. (Liquidity Management during Deposit Drain) A DI with the following balance sheet (in millions) expects a net deposit drain of $10 million. Assume that the DI uses either one of the following methods to fund the net deposit drain: I. Purchased Liquidity method via borrowing funds; II. Stored Liquidity Management method. (a) Write out the DI's balance sheets right after adjusting to the liquidity drain using method I or method II. (b) Suppose the DI can only receive 75% and 85% of the fair market values of the loans and the securities respectively under the situation of fire sale. What is the liquidity index of the bank asset portfolio (including cash, loans and securities) after the adjustment by each of the methods? (Note that the DI receives 100% of the fair market values of cash under fire sale.)
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