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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

Under a bilateral CSA, Bank A has a net mark-to-market exposure to Fund B of USD 12.0 million. The CSA has a threshold for Fund B of USD 5.0 million, a minimum transfer amount (MTA) of USD 0.5 million, and no independent amount. Bank A has already received USD 6.0 million of collateral from Fund B. What is the margin call by Bank A at the next valuation date?

The margin call is USD 1.0 million. Required collateral is exposure less threshold, 12.0 minus 5.0, which is 7.0 million. Since 6.0 million is already held, the shortfall is 1.0 million, which exceeds the 0.5 million minimum transfer amount, so the call is triggered.

  1. AUSD 1.0 millionCorrect
  2. BUSD 7.0 million
  3. CUSD 0 because the exposure is below the collateral held
  4. DUSD 6.0 million

Explanation

Required collateral = exposure minus threshold = 12.0 - 5.0 = 7.0 million. Collateral already held is 6.0 million, so the call is 1.0 million, which exceeds the 0.5 million MTA and so is made. Ignoring the collateral already held gives the 7.0 million distractor.

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