FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A dealer repos out bonds with a market value of 102 million at a 2% haircut. Using the convention that the haircut is a percentage of collateral market value, how much cash does the dealer receive?
The dealer receives 99.96 million. With a 2% haircut defined on collateral market value, cash lent equals 102 million multiplied by 0.98. The haircut gives the lender a cushion, so the cash advanced is below the collateral's market value.
- A99.96 millionCorrect
- B104.04 million
- C100.00 million
- D102.00 million
Explanation
Cash = collateral value × (1 − haircut) = 102 × 0.98 = 99.96 million. Dividing by 0.98 gives 104.08 million-type errors, and 104.04 wrongly adds the haircut. Ignoring the haircut gives 102 million.
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