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

A bank has USD 150 million of unencumbered government bonds and USD 80 million of unencumbered corporate bonds eligible at the central bank. Haircuts are 2% on government bonds and 10% on corporate bonds. What is the maximum intraday credit the bank can draw against this collateral?

Capacity is the haircut-adjusted collateral value: 150 million of government bonds at 98% gives 147 million and 80 million of corporate bonds at 90% gives 72 million, a total of USD 219 million.

  1. AUSD 219 millionCorrect
  2. BUSD 230 million
  3. CUSD 222 million
  4. DUSD 211 million

Explanation

Government: 150 x (1 - 0.02) = 147. Corporate: 80 x (1 - 0.10) = 72. Sum = 219. Ignoring haircuts gives 230; applying haircuts the wrong way (adding) gives other values.

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