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

A treasurer funds a portfolio of corporate bonds through overnight repo and is concerned about rollover risk. Which action most directly reduces the risk that the funding will be withdrawn or repriced severely during a market stress episode?

Using term repo with staggered maturities and haircuts fixed for the term most directly reduces rollover risk. It lengthens the funding horizon, avoids concentrated rollover dates and limits sudden haircut increases during stress, whereas weaker collateral or single-counterparty reliance increases vulnerability.

  1. AMoving from overnight repo to term repo with maturities staggered across dates, with haircuts fixed for the termCorrect
  2. BSwitching to lower-quality collateral that earns a higher yield
  3. CReducing the haircut by agreeing to an unsecured top-up with the lender
  4. DConcentrating all repo funding with the single largest dealer

Explanation

Term repo with staggered maturities lengthens funding tenor and avoids a cliff of rollovers, and fixed haircuts limit margin shocks. Lower-quality collateral raises haircut and run risk, and concentration raises counterparty dependency.

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