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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A bank has a USD 200 million overnight repo against collateral valued at 105% of the cash lent (a 5% initial margin, expressed as a ratio of collateral to cash). Overnight, the collateral's market value falls by 3%. Assuming the contract requires collateral to be maintained at 105% of the cash lent, what margin call, in USD, must the borrower meet?

The borrower must post USD 6.30 million. Collateral of 210 million falls 3% to 203.7 million, while 105% of 200 million cash still requires 210 million. The 6.3 million gap is the margin call. Applying 3% to the cash amount instead gives the incorrect 6.0 million.

  1. AUSD 6.30 millionCorrect
  2. BUSD 6.00 million
  3. CUSD 12.60 million
  4. DUSD 3.15 million

Explanation

Initial collateral = 200 × 1.05 = 210 million. After a 3% fall it is 210 × 0.97 = 203.7 million. Required is 210 million, so the shortfall is 6.3 million. Using 3% of the cash (6.0 million) uses the wrong base, since the fall applies to the collateral value.

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