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Answer: The company must post $1.41 million value in bonds
The end-of-day exposure to the financial institution is **$11.2 million**. With a **$10.0 million threshold**, the amount of collateral required is: \[ 11.2 - 10.0 = 1.2 \text{ million} \] Because the collateral is **bonds with a 15% haircut**, only **85%** of the bond market value counts as collateral: \[ 0.85 \times \text{bond value} = 1.2 \] \[ \text{bond value} = \frac{1.2}{0.85} = 1.4118 \text{ million} \] So the company must post approximately **$1.41 million in bonds**.
Author: Manit Arora
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Q-146.1 Collateralization in the over-the-counter (OTC) market
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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