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

During market stress, repo lenders raise the haircut on a dealer's collateral from 2% to 8%. The dealer holds 500 million of collateral market value financed in repo. By how much does its cash funding fall, assuming the same collateral and haircut defined as a percentage of market value?

Funding falls by 30 million. Cash raised drops from 490 million at a 2% haircut to 460 million at 8%, so the dealer must replace the 30 million difference from other sources or sell assets, illustrating procyclical haircut risk.

  1. A30 millionCorrect
  2. B40 million
  3. C6 million
  4. D470 million

Explanation

Funding before = 500 x 0.98 = 490 million; after = 500 x 0.92 = 460 million. The fall is 30 million. Option 6 million mistakes the percentage point change for millions; 470 is wrong arithmetic.

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