NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management
A broker's client has 1,000 shares of a company, bought at Rs 500, which the broker holds as margin collateral after the client delivers it through a margin pledge. The share has a 20% haircut in the margin system and the current market price is Rs 400. What collateral value will the broker credit against the client's margin requirement?
The credited collateral value is Rs 3,20,000. Collateral is valued at the current market price of Rs 400 per share, giving Rs 4,00,000 for 1,000 shares, and the 20% haircut reduces it by Rs 80,000. The purchase cost of Rs 500 is irrelevant to the valuation.
- ARs 4,00,000
- BRs 3,20,000Correct
- CRs 4,00,000 less 20% of Rs 5,00,000, that is Rs 3,00,000
- DRs 5,00,000 less 20%, that is Rs 4,00,000
Explanation
Collateral value uses the current market price, not the purchase cost. Market value is 1,000 x 400 = Rs 4,00,000. A 20% haircut leaves 4,00,000 x 0.8 = Rs 3,20,000. Applying the haircut to cost price is the common error.
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