FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A hedge fund funds a long position in a Treasury bond through repo. The lender raises the haircut from 2% to 5% on a position with market value USD 200 million. Holding the position constant, what is the additional equity funding the fund must provide, assuming the haircut is applied to market value?
The fund must supply an additional USD 6 million. Borrowing capacity falls from 196 million (98% of 200) to 190 million (95%), so the difference must be covered with equity. Ten million is wrong because it ignores the 4 million equity already posted at the 2% haircut.
- AUSD 6 millionCorrect
- BUSD 10 million
- CUSD 3 million
- DUSD 4 million
Explanation
Cash borrowed falls from 200 x 0.98 = 196m to 200 x 0.95 = 190m. The fund must replace 6m with its own equity. Using 5% of 200 (10m) ignores the equity already posted under the old haircut.
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