FRM Part II · FRM Exam Part II · Liquidity and Leverage
A hedge fund has 100 million of equity and 900 million of assets. Assets fall 4% in value and the fund wants to restore its original leverage ratio (assets/equity) of 9 by selling assets and repaying debt. What value of assets must it sell, to the nearest million?
The fund must sell 288 million of assets. After the 4% fall, assets are 864 million and equity is 64 million; restoring leverage of 9 means holding 576 million of assets, so it sells the 288 million difference.
- A36 million
- B324 million
- C288 millionCorrect
- D360 million
Explanation
Assets after the fall = 900 x 0.96 = 864 million, so equity = 864 - 800 = 64 million. Target assets = 9 x 64 = 576 million. Sale needed = 864 - 576 = 288 million. Check: debt falls to 512 and equity is 64, so assets are 576 and leverage is 9. The 324 option wrongly scales by the 36 loss times 9.
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