FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A hedge fund borrows cash through a 30-day repo. It sells bonds with a market value of USD 102 million and receives USD 100 million of cash. The repo rate is 3.6% per year on an actual/360 basis. What is the repurchase price payable at maturity?
The repurchase price is USD 100.30 million. Interest accrues on the cash borrowed of USD 100 million at 3.6% for 30/360 of a year, which is USD 0.30 million. The collateral value of USD 102 million does not enter the interest calculation.
- AUSD 100.30 millionCorrect
- BUSD 100.36 million
- CUSD 102.30 million
- DUSD 103.67 million
Explanation
Interest equals 100 million × 3.6% × 30/360 = 0.30 million, so the repurchase price is 100.30 million. Interest is charged on the cash lent, not on the collateral value, so 102.30 is wrong. Applying the rate for a full year gives 103.6, which is also wrong.
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