Skip to content

FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A dealer bank funds a portfolio of long-dated corporate bonds with overnight repos rolled each day. Which risk is most directly heightened by this funding structure?

Rollover risk is the main concern. Funding long-dated, illiquid bonds with overnight repo means the dealer must renew financing every day, so a rise in haircuts or a withdrawal of lenders can quickly create a liquidity shortfall and force asset sales.

  1. ARollover risk, because the funding must be renewed daily while the assets are illiquid and long-datedCorrect
  2. BInterest rate risk on the bonds is eliminated because funding reprices daily
  3. CCounterparty credit risk is eliminated because the repo is collateralised
  4. DSettlement risk is eliminated because repos are cash transactions

Explanation

Financing long-dated, less liquid assets with overnight repo creates a maturity mismatch, so the bank must roll its funding every day. If lenders raise haircuts or withdraw, the bank faces a liquidity squeeze. The other options wrongly claim risks disappear; collateral reduces but does not eliminate credit exposure.

Did you get it right without looking?

One question tells you little. A timed set on Repurchase Agreements and Financing shows your real accuracy, how long you take and where you lose marks.

Practise Repurchase Agreements and FinancingFree diagnostic mock

More Repurchase Agreements and Financing questions