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

A bank holds USD 200 million of eligible government bonds and USD 80 million of eligible corporate bonds that can be pledged at the central bank. Haircuts are 2% for government bonds and 10% for corporate bonds. The bank has already pledged USD 50 million (market value) of government bonds to a clearing house. Assuming the pledged amount is unavailable, what is the maximum intraday credit capacity from the remaining unencumbered collateral?

Capacity equals the haircut-adjusted value of unencumbered collateral: 150 million of government bonds at 98% gives 147 million, plus 80 million of corporates at 90% gives 72 million, totaling 219 million.

  1. AUSD 222.0 millionCorrect
  2. BUSD 268.0 million
  3. CUSD 270.0 million
  4. DUSD 280.0 million

Explanation

Unencumbered government bonds = 200 - 50 = 150; after 2% haircut = 147. Corporate bonds = 80 x 0.90 = 72. Total = 147 + 72 = 219. Recomputing: 150 x 0.98 = 147.0 and 72.0 sum to 219.0, so none of the options match exactly; the stated figure must be rechecked.

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