Skip to content

FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank has a USD 200 million collateral pool of corporate bonds valued at market, with a 10% haircut required by its repo counterparty. It wants to raise cash by repo and also hold a liquidity buffer equal to a 5-percentage-point increase in the haircut applied to the same collateral (stress). Under the stressed haircut of 15%, how much additional collateral must the bank post to keep a repo borrowing of USD 180 million, assuming the 180 million was fully secured at the original haircut using exactly 200 million of collateral?

The bank must post about USD 12 million more. At a 15% haircut, collateral required for 180 million of cash is 180 divided by 0.85, about 211.8 million. Subtracting the 200 million already posted leaves a top-up of roughly 11.8 million, closest to 12.0 million.

  1. AUSD 10.6 millionCorrect
  2. BUSD 12.0 million
  3. CUSD 30.0 million
  4. DUSD 8.0 million

Explanation

Collateral needed at a 15% haircut = 180 / 0.85 = 211.76 million. The bank has 200 million posted, so additional is 11.76 million; however the original 200 x 0.90 = 180 holds, so the required top-up is 211.76 - 200 = 11.8. Nearest option list check: 10.6 is not right, so recompute carefully: 180/0.85 = 211.76, top-up 11.76, which is closest to 12.0.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity and Reserves Management: Strategies and Policies shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity and Reserves Management: Strategies and PoliciesFree diagnostic mock

More Liquidity and Reserves Management: Strategies and Policies questions