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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank has USD 400 million of unencumbered Level 1 government bonds, currently valued at market. In a repo stress scenario, lenders raise the haircut on these bonds from 2% to 8%. Ignoring other changes, by how much does the cash the bank can raise by repoing the entire holding fall?

Borrowing capacity falls by USD 24 million. At a 2% haircut the bank raises 392 million; at 8% it raises 368 million. The difference is 6% of the USD 400 million collateral, so the increase in haircut reduces cash by 24 million.

  1. AUSD 24 millionCorrect
  2. BUSD 32 million
  3. CUSD 6 million
  4. DUSD 368 million

Explanation

Cash at 2% haircut = 400 x 0.98 = 392. Cash at 8% haircut = 400 x 0.92 = 368. The fall is 392 - 368 = USD 24 million (6% of 400). USD 368 million is the post-stress cash, not the reduction.

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