Skip to content

FRM Part I · FRM Exam Part I · Learning From Financial Disasters

A fund resembling LTCM holds assets of USD 100 billion financed by USD 4 billion of equity and USD 96 billion of borrowing. A market shock lowers asset value by 3% and lenders do not change terms. What is the fund's equity after the loss, and what is the percentage fall in equity?

The fund loses USD 3 billion on its USD 100 billion of assets, leaving equity of USD 1 billion from USD 4 billion. That is a 75% decline, because leverage of 25 times magnifies the 3% asset loss.

  1. AUSD 1.0 billion; fall of 75%Correct
  2. BUSD 3.0 billion; fall of 25%
  3. CUSD 0.88 billion; fall of 78%
  4. DUSD 1.0 billion; fall of 25%

Explanation

Asset loss = 3% x 100 = USD 3 billion. Equity = 4 - 3 = USD 1 billion. Percentage fall = 3/4 = 75%, which equals leverage of 25 times multiplied by 3%. Option with 25% confuses the equity remaining with the fall.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions