FRM Part II · FRM Exam Part II · Liquidity and Leverage
A trading desk holds 200 million of securities financed in repo at a 4% haircut. The lender raises the haircut to 10% during market stress, and the securities are unchanged in value. How much additional funding must the desk find?
The desk needs 12 million of extra funding. Financing falls from 192 million (96% of 200) to 180 million (90% of 200), so the 6 percentage point rise in haircut on 200 million of securities creates a 12 million shortfall.
- A12 millionCorrect
- B20 million
- C8 million
- D18 million
Explanation
The loan at a 4% haircut is 200 x 0.96 = 192 million. At 10% the loan is 200 x 0.90 = 180 million. The desk must replace 12 million. The 8 million option wrongly uses 4% of 200, the old equity, and 18 million wrongly uses the new haircut less 1%.
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