FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement
A bank accepts a corporate bond as collateral under a CSA and applies a 10% haircut to its market value. The bond's market value is USD 5,000,000. What collateral value does the bank credit against the exposure?
The bank credits USD 4,500,000. A haircut reduces the collateral's recognised value, so market value of 5,000,000 is multiplied by one minus 10%. The haircut protects the receiver against price falls between the last margin call and liquidation of the collateral.
- AUSD 4,500,000Correct
- BUSD 5,500,000
- CUSD 4,545,455
- DUSD 500,000
Explanation
Credited value equals market value times (1 - haircut) = 5,000,000 x 0.90 = 4,500,000. Adding the haircut gives 5,500,000, which has the wrong sign. Dividing by 1.10 gives 4,545,455, which is the wrong base. USD 500,000 is the haircut amount itself, not the credited value.
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