Prepayment Risk
A mortgage prepayment option works much like a call option for the borrower.... Read More
A repurchase agreement (or simply “repo”) is the sale of a security with a simultaneous agreement by the seller to buy back the same security from the same buyer at an agreed-upon price. When a repurchase agreement is viewed from the perspective of the cash lending party, it is commonly called a reverse repurchase agreement.
Repo Margin
Each market participant in a repurchase agreement is exposed to counterparty defaults, regardless of the collaterals posted. The agreement is such that the lender is always the most vulnerable party. As such, the repo margin (called haircut in the US) is the difference between the market value of the security used as collateral and the value of the loan.
Factors Affecting the Repo Margin
The level of margin is dependent on the following factors:
- the length of the repurchase agreement: the longer the repurchase agreement, the higher the repo margin;
- the quality of the collateral: the higher the quality, the lower the repo margin;
- the credit quality of the counterparty: the higher the creditworthiness, the lower the repo margin;
- the supply and demand for collateral: repo margins are lower if the collateral is in high demand.
Question
Which of the following factors lowers the level of the repo margin?
- A longer repurchase agreement.
- A higher quality of the collateral.
- A lower creditworthiness of the borrower.
Solution
The correct answer is B.
The quality of the collateral is one of the determinants of the repo margin. The higher the quality of the collateral, the lower the level of the repo margin.
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.