FRM Part II · FRM Exam Part II · Liquidity and Leverage
A bank holds a bond position with a market value of USD 200 million, financed in the repo market at a 5% haircut. The haircut rises to 15% during a market stress, and the bank must fund the difference from its own resources. Assuming the market value is unchanged, what additional cash is required?
The bank needs an additional USD 20 million. Borrowing falls from USD 190 million at a 5% haircut to USD 170 million at a 15% haircut, so the bank must replace the USD 20 million difference with its own cash or other funding.
- AUSD 10 million
- BUSD 20 millionCorrect
- CUSD 30 million
- DUSD 170 million
Explanation
Initial borrowing is 200 x 0.95 = 190 million. After the increase, borrowing is 200 x 0.85 = 170 million. The shortfall is 190 - 170 = 20 million. USD 10 million is the initial haircut equity, and USD 30 million is the new haircut amount.
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