FRM Part II · FRM Exam Part II · Derivatives
A bank agrees a CSA with a hedge fund featuring a threshold of USD 5 million, a minimum transfer amount of USD 1 million, and daily margining. The bank's exposure to the fund is USD 9.4 million and no collateral is currently held. Assuming the call is made and met, how much collateral should be called?
The bank should call USD 4.4 million, being exposure of USD 9.4 million less the USD 5 million threshold. Because this exceeds the USD 1 million minimum transfer amount, the call is actually made. The threshold remains uncollateralized exposure.
- AUSD 9.4 million
- BUSD 5.0 million
- CUSD 4.4 millionCorrect
- DUSD 0 because the call is below the minimum transfer amount
Explanation
Collateral required is exposure above the threshold: 9.4 - 5 = 4.4 million. This exceeds the 1 million minimum transfer amount, so the call is made. The threshold is not collateralized, so calling the full 9.4 million ignores it.
Did you get it right without looking?
One question tells you little. A timed set on Derivatives shows your real accuracy, how long you take and where you lose marks.
More Derivatives questions
- A risk manager reviews a bilateral CSA with daily margin calls. Even with daily variation margin, the bank still faces potential losses if t…
- A bank buys five-year CDS protection from a dealer on a corporate reference entity. The dealer is a bank in the same country, and its own cr…
- A risk manager reviews a CCP's default fund sizing policy. Which standard best reflects the 'Cover 2' principle commonly applied to systemic…
- A bank clears a portfolio of interest rate swaps through a CCP and previously held them bilaterally under a netting agreement with a dealer.…
- A risk manager holds a corporate bond and has bought CDS protection on the same issuer from a dealer bank that is highly correlated with the…
- A bank buys a put option on its own corporate client's shares from that same client's parent holding company, which has most of its assets i…