FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
A dealer's CSA with a client allows posting of government bonds as collateral. A bond with market value USD 40 million is posted subject to a 5% haircut. How much collateral value does the dealer credit against the exposure?
The dealer credits USD 38 million. A 5% haircut reduces the market value of the posted bond to protect against price falls during the margin period of risk, so 40 million times 0.95 equals 38 million of collateral value against the exposure.
- AUSD 42.0 million
- BUSD 38.0 millionCorrect
- CUSD 40.0 million
- DUSD 35.0 million
Explanation
The haircut reduces the credited value: 40 x (1 - 0.05) = USD 38 million. Adding the haircut gives 42, which is the wrong sign. Ignoring it gives 40.
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