FRM Part II · FRM Exam Part II · Liquidity and Leverage
A trader holds a USD 200 million bond position financed in repo with a 5% haircut. The position's market value is unchanged, but the dealer raises the haircut to 8%. Assuming the fund must keep the same position, how much additional cash does it need to supply?
The fund must supply an additional USD 6 million. At a 5% haircut, equity funding is USD 10 million; at 8% it is USD 16 million on the USD 200 million position. The difference is the extra cash the fund needs to meet the higher haircut.
- AUSD 3 million
- BUSD 6 millionCorrect
- CUSD 10 million
- DUSD 16 million
Explanation
Equity at 5% is 10 million; at 8% it is 16 million. The additional cash required is 16 - 10 = USD 6 million. USD 3 million results from subtracting the percentages and applying them to a 100 million base, a wrong base.
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