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Answer: The company must post $1.41 million value in bonds
**D. The company must post $1.41 million in bonds.** The company must post collateral in excess of the threshold. In this case, $11.2 - $10 million = $1.2 million. The company can post $1.2 million in cash (not a given answer!) or the company can post the bonds, but as they have a 15% haircut, requires: $1.2 million / (1-15%) = $1.41 million; i.e., $1.4 million * 85% = $1.2 million.
Author: Manit Arora
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Q-146.1. A company must post collateral with a financial institution, and the threshold level (in the collateralization agreement) is $10.0 million. Instead of cash, the company posts bonds as collateral subject to a 15% haircut. The value of the contract, at the beginning of the day, is $9.0 million to the financial institution. By the end of the day, the marked-to-market value of the contract to the financial institution has increased to $11.2 million. What is the impact on the collateral?
A
No margin call
B
The company must post $1.41 million in cash
C
The company must post $1.02 million value in bonds
D
The company must post $1.41 million value in bonds
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