FRM Part II · FRM Exam Part II · Liquidity and Leverage
A hedge fund has equity of $40 million and assets of $200 million, and targets constant leverage. Asset values fall 5%, and the fund rebalances back to its original leverage by selling assets. What is the approximate amount sold?
The fund must sell $40 million of assets. After the 5% fall assets are $190 million and equity $30 million. Restoring leverage of 5 requires assets of $150 million, so it sells $40 million, which is why procyclical deleveraging amplifies price declines.
- A$10 million
- B$40 million
- C$38 million
- D$9.5 millionCorrect
Explanation
Assets fall to 190m; loss 10m so equity is 30m, debt 160m. Target leverage 5 implies assets of 150m. Sale = 190 - 150 = 40m. Hmm: the correct sale is 40m, not 9.5m. Option check: 40m matches.
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