Skip to content

FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

A dealer bank finances a USD 100 million position in corporate bonds in the repo market. The bonds are valued at 100 and the repo haircut is 8%. How much of the position must the dealer fund with its own unsecured funding or equity?

With an 8% haircut the dealer borrows 92% of the bond value, or USD 92 million, so the remaining USD 8 million must be funded from equity or unsecured sources. USD 92 million is the repo cash raised, not the funding gap.

  1. AUSD 8 millionCorrect
  2. BUSD 12.5 million
  3. CUSD 92 million
  4. DUSD 108 million

Explanation

Cash borrowed = 100 x (1 - 0.08) = USD 92 million. The remaining 100 - 92 = USD 8 million must come from other sources. Dividing by 0.92 or 1.08 misapplies the haircut, and 92 is the repo cash, not the gap.

Did you get it right without looking?

One question tells you little. A timed set on The Failure Mechanics of Dealer Banks shows your real accuracy, how long you take and where you lose marks.

Practise The Failure Mechanics of Dealer BanksFree diagnostic mock

More The Failure Mechanics of Dealer Banks questions