FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A hedge fund has USD 200 million of securities financed in repo. The repo haircut is 5%, so it borrows 95% of value. The fund has USD 10 million of equity funding the haircut. Securities fall 4% in value and the repo lender issues a margin call to restore the 5% haircut on the new market value. Ignoring interest, what is the approximate cash the fund must post?
The fund must post about USD 7.6 million. After a 4% fall the collateral is worth 192 million, supporting a loan of 182.4 million at a 5% haircut. Against the existing 190 million loan, the fund must pay down 7.6 million.
- AUSD 8.0 million
- BUSD 7.6 millionCorrect
- CUSD 0.4 million
- DUSD 1.8 million
Explanation
New value = 200 x 0.96 = 192 million. Required loan = 192 x 0.95 = 182.4 million. Existing loan = 200 x 0.95 = 190 million. The fund must repay 190 - 182.4 = 7.6 million. The 8.0 figure is simply the 4% price loss, ignoring that the loan is reduced only to the new allowed level.
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