FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A bank borrows cash in a repo against government bonds with a market value of 103 million and a 3% haircut defined as the percentage reduction from market value. What cash amount does the bank receive?
The bank receives 99.91 million. With a 3% haircut applied to a 103 million market value, the lender advances 97% of the collateral value, which is 103 multiplied by 0.97, equal to 99.91 million.
- A99.91 millionCorrect
- B100.00 million
- C106.09 million
- D103.00 million
Explanation
Cash = 103 x (1 - 0.03) = 99.91 million. Option 100.00 treats the haircut as an overcollateralisation divided into 103 (103/1.03), which is a different convention. Adding the haircut gives 106.09, a wrong sign.
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