FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks
A dealer bank funds a $10 billion portfolio of securities with overnight repo. The repo haircut is 5% before stress and rises to 15% during stress. Assuming the dealer must keep the same portfolio and replace the lost repo funding with its own cash, how much additional cash does it need?
The dealer needs an additional $1.0 billion. The haircut rise from 5% to 15% lifts own-cash funding from $0.5 billion to $1.5 billion on a $10 billion portfolio, so the increment is $1.0 billion. Stating $1.5 billion ignores the cash it already provided.
- A$0.5 billion
- B$1.0 billionCorrect
- C$1.5 billion
- D$10.0 billion
Explanation
Before stress the dealer funds 5% of $10bn = $0.5bn with its own cash. After the haircut rises to 15% it must fund $1.5bn itself. Additional cash = $1.5bn − $0.5bn = $1.0bn. The $1.5bn option forgets the cash already committed.
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.
More The Failure Mechanics of Dealer Banks questions
- A dealer bank has total assets of $200 billion and equity of $5 billion. Management reports gross leverage. If a 2% fall in the market value…
- Which policy reform most directly addresses the concern that a failing dealer bank's tri-party repo investors will withdraw funding en masse…
- Which policy reform discussed for dealer bank failures is designed to ensure that a failing dealer has enough loss-absorbing resources to be…
- A regulator is designing a single-point-of-entry (SPOE) resolution for a dealer bank holding company. Which description best reflects how SP…
- A dealer bank's prime brokerage unit holds hedge fund clients' cash balances and rehypothecable securities. Rumours of losses spread. Which …
- Which development best describes why a run on a dealer's tri-party repo funding may be more damaging when the dealer relies on lower-quality…