Swap dealers Silverman Inc. and Morgan Standard enter into a complex credit derivative transaction, which is over-the-counter, i.e. not a cleared transaction.

Swap dealers Silverman Inc. and Morgan Standard enter into a complex credit derivative transaction, which is over-the-counter, i.e. not a cleared transaction. They are subject to the “margin requirements for non-centrally cleared derivatives”. As per regulations, they are required to exchange Initial Margin (IM) and Variation Margin (VM). The swap dealers do not have approved internal models, hence they will use the standard regulatory “initial margin” schedule. Margin posted by the firms are also subject to the standardized hair-cut schedule. (both the regulatory initial margin schedule and the haircut schedule are attached).

Notional Value of trade is $500MM. Tenor of trade is 5 years.

Please answer the following questions in a separate document and upload.

1. Calculate the Initial Margin required to be posted by each firm.

2. Silverman Inc. chooses to post high-quality corp. bonds with residual maturity less than 1 year. (i) What will be the haircut applied in % terms to value the collateral? (ii) Accounting for the haircut, what is the value of corporate bonds that Silverman Inc. will post to satisfy its IM requirement?