easy · FRM Part 2 Liquidity & Treasury Risk
Which of the following describes the relationship between asset volatility and repo haircuts in a risk-sensitive framework?
- Haircuts are fixed by regulatory decree and do not adjust with market volatility at all.
- Haircuts typically widen as collateral volatility increases to provide a larger safety buffer.
- Haircuts only increase if the credit rating of the borrowing counterparty is formally downgraded.
- Haircuts decrease as volatility increases, on the theory this encourages continued market liquidity.
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