Skip to content

FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank funds a securities portfolio with overnight repo at a 5% haircut against collateral that it posts. Market stress causes dealers to raise the haircut to 12% on the same collateral, valued at USD 200 million. Assuming the bank keeps the full position funded by repo, what additional funding must it find from other sources?

The bank must find USD 14 million. At a 5% haircut it borrowed 190 million against 200 million of collateral; at 12% it can borrow only 176 million. The 14 million difference is the extra funding needed, illustrating rollover and haircut risk in repo.

  1. AUSD 14 millionCorrect
  2. BUSD 24 million
  3. CUSD 10 million
  4. DUSD 38 million

Explanation

Cash raised at 5% haircut = 200 x 0.95 = 190; at 12% = 200 x 0.88 = 176. Shortfall = 14 million. Using 12% - 5% on 200 gives 14 as well, but 24 is the cash at 12% of collateral, 10 is a 5% haircut misuse, and 38 is 19% error. The shortfall must be financed by other liabilities or asset sales.

Did you get it right without looking?

One question tells you little. A timed set on Managing Nondeposit Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Managing Nondeposit LiabilitiesFree diagnostic mock

More Managing Nondeposit Liabilities questions