Answer: A higher haircut reduces or mitigates the counterparty risk faced by the lender

## Explanation In a classic repurchase agreement (repo): - **Bank A** (repo seller) borrows cash by selling securities with an agreement to repurchase them later - **Counterparty B** (repo buyer) lends cash by purchasing securities with an agreement to sell them back later Regarding the statement about haircuts: - A **haircut** is the percentage difference between the market value of the collateral and the amount of cash lent - A **higher haircut** means the lender provides less cash relative to the collateral's value - This **increases** the lender's protection because if the borrower defaults, the lender can sell the collateral and is more likely to recover the full loan amount - Therefore, a higher haircut **does reduce** counterparty risk for the lender Since the question asks "except which is false" and the statement about haircuts is actually **true**, this appears to be the correct answer. The statement is presented as something that should be false, but it's actually a true characteristic of repo transactions. **Key takeaway**: Higher haircuts provide greater protection to lenders in repo transactions by creating a larger buffer between the collateral value and the loan amount.

Author: LeetQuiz .