FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009
A broker-dealer holds USD 50 billion of assets financed by USD 48.5 billion of liabilities, mostly overnight repo. Its assets then fall in value by 2%, with liabilities unchanged. What is its leverage ratio (assets divided by equity) after the loss?
Equity starts at USD 1.5 billion. A 2% fall in assets removes USD 1.0 billion, leaving equity of USD 0.5 billion and assets of USD 49 billion. Leverage is 49 divided by 0.5, which equals 98.
- A33.3
- B50.0
- C98.0Correct
- D49.0
Explanation
Initial equity = 50 - 48.5 = 1.5 billion, leverage 33.3 before the loss. A 2% loss is 1.0 billion, so assets are 49.0 billion and equity is 0.5 billion. Leverage = 49.0/0.5 = 98. The 33.3 option ignores the loss.
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