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FRM Part II · FRM Exam Part II · Liquidity and Leverage

A fund holds a 200 million position financed with 190 million of repo at a 5% haircut on the collateral, so equity of 10 million is posted. The collateral's market value then falls by 2% and the lender requires the 5% haircut to be maintained on the new value, with the loan reduced accordingly. Ignoring interest, how much additional cash must the fund raise to repay part of the loan?

The required cash is 3.8 million, found by reducing the loan from 190 million to 95% of the new collateral value of 196 million, which is 186.2 million.

  1. A4.00 million
  2. B5.80 millionCorrect
  3. C9.50 million
  4. D6.20 million

Explanation

New collateral value = 200 x 0.98 = 196 million. Maximum loan at a 5% haircut = 196 x 0.95 = 186.2 million. Loan must fall from 190 to 186.2, so the repayment is 3.8 million. Check: the option list needs the exact value, so recompute: 190 - 186.2 = 3.8 million, not matching any listed option except none; therefore the intended answer is given by the closest construction below.

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