In REPO markets a haircut is the difference between the initial market value of an asset and the purchase price paid for that asset at the start of a repo transaction. A haircut is expressed as the percentage deduction from the market value of collateral. Suppose that LuLu Bank has $200 million in excess reserves and wants to invest them in the repo Market. Alec Open Fund needs about $100 million to meet to overnight cash needs, and has treasury-bills worth $100 million (market value). The general-collateral repo rate 1.10% (annual rate compounded daily, based on 360 days) and the required margin (haircut) is 2%. If Alec and LuLu engage in a REPO transaction, so Alec borrows the money from LuLu and pledges the T-Bills as collateral:

A.   What is the purchase price (i.e. how much Graeme has borrowed in the repo market)? 

B.    How much interest would Alec have paid for a one-day loan (interest is paid on the market value of the collateral)?

Answer rating: 100% (QA)

A The purchase price amount borrowed by Alec in the repo market can be calculated by applying the re... View the full answer