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A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. If these CDOs can be used in a repo transaction at a 20% haircut, what is the maximum leverage factor for a transaction with the CDOs?
Suggested Answer: C
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15 comments · newest first
AR
Art
1 month ago
So, D is definitely the right choice!
RO
Romana
1 month ago
Exactly! 1 divided by (1 - 0.2) gives us 5.
KE
Kent
1 month ago
But with a 20% haircut, isn't the leverage factor more like 5?
AR
Art
2 months ago
I feel like it's about understanding the haircut. I lean towards option D.
RO
Romana
2 months ago
Yeah, I agree. The leverage factor is crucial here.
KE
Kent
2 months ago
This question is tricky. I think the haircut really matters.
PE
Pearly
2 months ago
0.8 seems too low for CDOs, but I guess it checks out.
AL
Alysa
2 months ago
I thought CDOs had more flexibility than that!
EL
Elena
2 months ago
Wait, is it really that straightforward?
NG
Nguyet
3 months ago
Definitely going with option A, makes the most sense.
JU
Justine
3 months ago
The haircut means you can only leverage up to 80%.
DE
Desirae
3 months ago
I feel like I might be mixing up the concepts here. The haircut reduces the collateral value, but does that mean we can leverage more? I’m confused about how to apply that to the options.
ET
Ethan
3 months ago
I practiced a similar question where the leverage was based on the haircut percentage. I think it was something like 1 divided by the haircut percentage, but I can't recall the exact formula.
GW
Gwenn
3 months ago
I remember something about leverage being calculated based on the haircut. If it's a 20% haircut, then we can leverage 5 times the value, right? So I’m leaning towards option D.
AL
Alease
4 months ago
I think the haircut means we can only use 80% of the CDO's value, so maybe the leverage factor is 1.25? But I’m not sure how that translates to the options given.