FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A dealer repos bonds with a market value of USD 102 million and receives USD 100 million in cash for 30 days at a repo rate of 3.6% (Actual/360). What is the repurchase price, and what is the haircut?
The repurchase price is USD 100.30 million, since interest is 100 million times 3.6% times 30/360, or 0.30 million. The haircut is measured on collateral value: (102 minus 100) divided by 102, about 1.96%.
- AUSD 100.30 million; haircut of about 1.96%Correct
- BUSD 100.30 million; haircut of 2.00%
- CUSD 103.67 million; haircut of about 1.96%
- DUSD 100.36 million; haircut of 2.00%
Explanation
Interest = 100m x 3.6% x 30/360 = 0.30m, so repurchase price is 100.30m. Haircut = (102 - 100)/102 = 1.96%. Using 2.00% divides by the cash rather than collateral value, which is the wrong base.
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