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

A bank holds USD 500 million of government bonds eligible for a central bank intraday credit facility, with a 4% haircut. It has already pledged USD 120 million of market value of these bonds to a clearing house and the remainder is unencumbered. What intraday credit capacity does the unencumbered collateral provide?

The capacity is USD 364.8 million. Unencumbered bonds are 500 minus 120, or 380 million, and the 4% haircut leaves 96% of that value, giving 364.8 million of usable intraday credit. Ignoring the haircut would overstate capacity at 380 million.

  1. AUSD 364.8 millionCorrect
  2. BUSD 380.0 million
  3. CUSD 480.0 million
  4. DUSD 345.6 million

Explanation

Unencumbered market value = 500 - 120 = 380 million. Applying the 4% haircut gives 380 x 0.96 = 364.8 million. Applying the haircut to the full 500 and subtracting 120 gives a wrong figure (360), and ignoring the haircut gives 380.

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