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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A hedge fund holds USD 200 million of bonds financed in repo at a 5% haircut. The haircut on this collateral rises to 15% and the bonds' market value is unchanged. Assuming the fund keeps the full position, how much additional cash must it raise?

The fund must raise USD 20 million. The loan falls from 95% of USD 200 million, which is USD 190 million, to 85%, which is USD 170 million. The difference is the extra cash needed to keep the position funded.

  1. AUSD 10 million
  2. BUSD 20 millionCorrect
  3. CUSD 30 million
  4. DUSD 170 million

Explanation

Initial loan = 200 x 0.95 = 190 million. New loan = 200 x 0.85 = 170 million. Additional equity needed = 190 - 170 = 20 million. The 10 million option is just the change in haircut of 10 points applied to 100, the 30 million option mistakenly uses 15% of value.

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