FRM Part II · FRM Exam Part II · Liquidity Risk
During a crisis, a dealer bank holds a position it financed overnight in the repo market. The position is worth 100 and the repo haircut rises from 5% to 20%. Assuming the bank must keep the position, how much additional unsecured funding must it find?
The bank needs 15 of additional funding. Repo financing falls from 95 (100 less a 5% haircut) to 80 (100 less a 20% haircut), so the increase in the haircut of 15 percentage points on a 100 position must be funded elsewhere.
- A5
- B15Correct
- C20
- D25
Explanation
Secured funding raised equals value times (1 - haircut). At a 5% haircut it is 95; at 20% it is 80. The bank must replace 95 - 80 = 15 with other funding. Choosing 20 uses the new haircut alone, ignoring the original financing.
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