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

A dealer borrows USD 100 million in a term repo, posting bonds worth USD 105 million (haircut 5% of collateral value, initial margin is on that basis, so cash lent = 100 million). Rates: bond price falls 4% so collateral is worth USD 100.8 million. The lender requires maintenance so that the haircut is restored on the current collateral value. Assuming cash stays at USD 100 million and the dealer must restore a 5% haircut on market value (collateral value x 0.95 = cash lent), what additional collateral value must be posted, to the nearest USD 0.1 million?

The dealer must post about USD 4.5 million more collateral. To keep a 5% haircut against 100 million of cash, collateral must be worth 100/0.95 = 105.26 million. After the 4% price fall it is worth 100.8 million, leaving a shortfall of roughly 4.46 million.

  1. AUSD 4.5 millionCorrect
  2. BUSD 4.2 million
  3. CUSD 5.0 million
  4. DUSD 6.2 million

Explanation

Required collateral = 100 / 0.95 = 105.263 million. Current collateral = 105 x 0.96 = 100.8 million. Shortfall = 105.263 - 100.8 = 4.463, about 4.5 million. Using 105 - 100.8 = 4.2 ignores that the haircut must be restored on the current value, i.e. the wrong base.

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