A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations.

Identify the transaction details:

Initial value of CDOs = $100

Haircut = 20%

Repo transaction:

With a 20% haircut, the trader can use the CDOs to obtain 80% of their value in cash:

Cash obtained=100×(1−0.20)=80Cash obtained=100×(1−0.20)=80

Explanation:

The trader buys $100 worth of CDOs and then uses these CDOs in a repo transaction to get back $80 (less interest). This fully utilizes the leverage provided by the repo transaction under the specified conditions.