FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A hedge fund finances a 50 million (market value) bond position in the tri-party repo market with a 4% haircut. The overnight repo rate is 5.00% on an actual/360 basis. Ignoring other costs, what is the approximate cash raised and the interest due on repayment after one day?
Cash raised is 48 million and one-day interest is about 6,667. The haircut reduces the cash lent to 96% of collateral value, and interest accrues on cash borrowed, not on collateral value: 48m × 5% / 360.
- ACash 48.0 million; interest about 6,667
- BCash 48.0 million; interest about 6,944Correct
- CCash 52.0 million; interest about 7,222
- DCash 50.0 million; interest about 6,944
Explanation
Cash = 50m × (1 − 0.04) = 48.0m. Interest = 48,000,000 × 5% × 1/360 = 6,666.67 ... recompute: 48,000,000 × 0.05 = 2,400,000; /360 = 6,666.67. So the interest is 6,667, not 6,944 (which is 50m based).
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