FRM Part II · FRM Exam Part II · Liquidity Risk
A dealer finances a USD 200 million bond position through repo with a 5% haircut, so it must fund the haircut with its own equity. Lenders raise the haircut to 12% and the position value stays at USD 200 million. How much additional equity or unsecured funding must the dealer find to hold the position unchanged?
The dealer needs an additional USD 14 million. The haircut rises from 5% to 12% on USD 200 million, so the required own funding increases from USD 10 million to USD 24 million, a difference of USD 14 million.
- AUSD 14 millionCorrect
- BUSD 24 million
- CUSD 10 million
- DUSD 38 million
Explanation
Original equity requirement is 5% x 200 = USD 10 million. New requirement is 12% x 200 = USD 24 million. The additional funding needed is 24 - 10 = USD 14 million. USD 24 million ignores the existing equity already posted.
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