FRM Part II · FRM Exam Part II · Liquidity and Leverage
An investor holds assets of USD 200 million financed with USD 20 million of equity and USD 180 million of repo borrowing. The lender raises the haircut so that the maximum borrowing on the same assets falls from 90% to 85% of asset value. Assuming asset values are unchanged, what is the additional cash the investor must raise to keep the assets?
The investor must raise USD 10 million. Financing capacity drops from 90% to 85% of USD 200 million, i.e. from USD 180 million to USD 170 million, so USD 10 million of debt must be repaid from other cash or asset sales.
- AUSD 5 million
- BUSD 10 millionCorrect
- CUSD 15 million
- DUSD 20 million
Explanation
Borrowing capacity falls from 0.90 x 200 = 180 million to 0.85 x 200 = 170 million. The investor must repay 10 million. Option 0 uses the 5% haircut change without applying it to the USD 200 million of assets.
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