FRM Part II · FRM Exam Part II · Liquidity and Leverage
A bank has assets of USD 400 million and equity of USD 20 million. It targets constant leverage. Asset values rise by 5%. To return to its original leverage by borrowing and buying assets, how much additional assets must it purchase?
Equity rises to USD 40 million, so at 20x the bank needs USD 800 million of assets versus 420 now, requiring about USD 380 million of purchases. This illustrates procyclical leverage targeting.
- AUSD 20 million
- BUSD 80 millionCorrect
- CUSD 100 million
- DUSD 400 million
Explanation
Original leverage is 20x. Assets rise to 420, equity to 40. Target assets = 20 x 40 = 800... that equals 800, so purchases = 800-420 = 380? Check: equity rises by 20 to 40, but 5% of 400 is 20, so equity is 40. Target assets 800, purchases 380. Thus none matches; correct option is USD 380 million.
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