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Introduction Broker-dealers are required to maintain a certain minimum amount of net capital. The first step in calculating a firm's net capital is to determine
Introduction Broker-dealers are required to maintain a certain minimum amount of net capital. The first step in calculating a firm's net capital is to determine the firm's total capital. To then compute net capital. one must take charges against total capital to account for the inherent risk of positions held. These charges are called 'haircuts'. Technically, a haircut is defined as "a percentage that is subtracted from the par yalue of the assets that are being used as collateral. The size of the haircut reflects the perceiyed risk associated with holding the assets." We're going to determine the haircuts in some hypothetical situations. Part i: Currencies There is a separate haircut calculated for each foreign [i.e.. non-USU] currency. The first thing we need to do to calculate the haircut on a giyen currency is to figure out the firm's total exposure to that currency. A negatiye currency position indicates that the firm is short [or owes] the currency. There are two ways the accompanying spreadsheet will show currency exposure: 1] Actual cash is denoted 'cash' in the Position Symbol column, and can be in a yariety of different currencies. 'r'ou can see the symbol for the currency of the cash in the Currency column [EUR = Euro. GBP = British Pound, BRL = Brazilian Real. USD = US Dollar}. The USD yalue of the cash is shown in the Market lul'alue [USD] column. There may be seyeral cash lines for the same currency due to the positions being in different accounts. 2] We also have forwards. A forward is an agreement to buy a currency in the future. For risk purposes, it is essentially the same as actually owning the currency. So if we show a 'Forward EUR' position with a market yalue in USD, this is the same (for risk and haircut purposes] as if we had 'cash' with 'ELJF'.' in the Currency column. Add up the pieces to get to the total exposure for a currency. and apply a haircut to the absolute yalue of that total exposure. If the firm is long and short the same currency {whether in cash or fonyards]. the total currency risk is the net position in that currency. The haircut for ESP and EUR is 6%, while the haircut for EAR and BRL is sass. There is no haircut for USD positions. What is the total haircut in USD on the positions in the accompanying spreadsheet
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