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FNCE90046 Week 4 CaR & RAROC Calculations

The document presents financial calculations for undiversified and diversified economic capital (EC) across different business units (BUs), including correlations and marginal EC. It also details interest revenue, expenses, net profit before and after tax, and RAROC calculations for assessing performance. Additionally, it compares RAROC and EVA for two business units under different capital allocation scenarios.

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9 views

FNCE90046 Week 4 CaR & RAROC Calculations

The document presents financial calculations for undiversified and diversified economic capital (EC) across different business units (BUs), including correlations and marginal EC. It also details interest revenue, expenses, net profit before and after tax, and RAROC calculations for assessing performance. Additionally, it compares RAROC and EVA for two business units under different capital allocation scenarios.

Uploaded by

thhhh629
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Undiversified EC (method 1) Correlations

$
BU 1 500 BU 1
BU 2 400 BU 2
BU 3 700 BU 3
Total Ecap 1,600

Diversified EC (method 2 - Splitting)

BU 1^2 250,000
BU 2^2 160,000
BU 3^2 490,000
Covar BU 1 & 2 320,000
Covar BU 2 & 3 364,000
Covar BU 1 & 3 -70,000
Sum 1,514,000

SQRT 1,230

Proportion (Diversified to Undiversified) 0.769

BU 1 385
BU 2 308
BU 3 538
Diversified EC 1,230
Correlations Marginal EC (method 3)
BU 1 BU 2 BU 3
1.00 0.80 -0.10 Marginal BU 1
1.00 0.65
1.00 BU 2 400
BU 3 700
1,100

Diversified EC

BU 1^2 -
BU 2^2 160,000
BU 3^2 490,000
Covar BU 1 & 2 -
Covar BU 2 & 3 364,000
Covar BU 1 & 3 -
Sum 1,014,000

SQRT 1,007

Diversified BU 2 and 3 1,007


Diverified EC 1,230

Marginal BU 1 223
Marginal BU 2 Marginal BU 3
BU 1 500 BU 1 500
BU 2 400
BU 3 700
1,200 900

250,000 250,000
- 160,000
490,000 -
- 320,000
- -
-70,000 -
670,000 730,000

819 854

819 854
1,230 1,230

Marginal BU 2 412 Marginal BU 3 376

Total marginal 1,011


Interest Revenue $ 1,000,000,000 9% 90,000,000
Interest Expense $ 1,000,000,000 6% 60,000,000
Net interest margin 30,000,000
Less:
Operating costs (9,000,000)
Expected Losses $ 1,000,000,000 1% (10,000,000)

Plus: Return on invested EC $ 75,000,000 7% 5,250,000

Net 'profit' before tax 16,250,000


Tax @30% (4,875,000)
Net 'profit' after tax 11,375,000

RAROC = 15.2%
Slide 60 (lecture 4)
BU A BU B
Profit 80 120
Allocated CaR 640 1000
Utilised CaR 500 600
Utilised CaR/ Allocated CaR 78.125% 60.0%

RAROC (allocated CaR) 12.5% 12.0%


RAROC (utilised CaR) 16.0% 20.0%

EVA (allocated CaR, WACC = 12.5%) 0.0 -5.0 EP (EVA) = Risk-ad


EVA (utilised CaR, WACC = 12.5%) 17.5 45.0
Firm WACC: 12.50%

EP (EVA) = Risk-adjusted income – (WACC * Economic Capital)

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