FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks
A dealer bank finances a $200 million bond position in repo with a 5% haircut. During stress the haircut rises to 15%, and the bond price is unchanged. How much additional unsecured funding must the dealer find to keep financing the position?
The dealer must find an extra $20 million. At a 5% haircut the position raises $190 million, while at a 15% haircut it raises only $170 million. The $20 million difference must be covered from other, typically unsecured, sources.
- A$10 million
- B$20 millionCorrect
- C$30 million
- D$170 million
Explanation
Cash raised at a 5% haircut is 200 x 0.95 = $190 million. At 15% it is 200 x 0.85 = $170 million. The shortfall is $20 million. Choosing $10 million applies only the 5-point change to half the value, and $30 million uses the 15% haircut alone.
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