FRM Part II · FRM Exam Part II · Liquidity and Leverage
A fund has USD 30 million of equity and holds assets financed with a repo haircut of 6%, running at the maximum leverage the haircut permits. The haircut rises to 10% and asset values are unchanged. The fund's equity remains USD 30 million. By how much must it reduce its asset holdings (market value) to comply?
The fund must sell USD 200 million of assets. At a 6% haircut, USD 30 million of equity supports USD 500 million of assets; at 10% it supports only USD 300 million. The required reduction is the difference between those two asset levels.
- AUSD 120 million
- BUSD 200 millionCorrect
- CUSD 300 million
- DUSD 500 million
Explanation
Initial assets = 30/0.06 = USD 500 million. New maximum assets = 30/0.10 = USD 300 million. Reduction = USD 200 million. USD 300 million is the new asset level, not the reduction; USD 120 million wrongly applies the 4-point change to 30 million.
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