FRM: Risk-adjusted return on capital (RAROC)

RAROC is a risk-adjusted performance measure (RAPM): risk-adjusted return divided by economic capital (i.e., the capital reserved to cover unexpected losses). For more financial risk videos, visit our website! www.bionicturtl...

[@r0c4]

A+ on your teaching skills!

[@bionicturtle]

Thank you for watching! We appreciate your kind words.

[@vaquezartup365]

Check out this question
A bank is planning to make a loan of 5million to a steel firm. It expects to charge an upfront fee of 1.5% and a servicing fee of 50 basis points. The loan has a maturity of 8 years and a duration of 7.5 years. The cost of funds(the RAROC benchmark) for the loan is 10%. Assume that the bank has estimated that the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2% based on two years of historical data. The current market interest rate for loans in this sector is 12%
Using Raroc model should the bank make the loan.

[@mogtrader8]

Your videos make it to understand and learn a lot better.
What's the difference between RAROC and ADJUSTED RAROC?
Thanks.

[@vikramrajiyer]

Shouldn't we also subtract the cost of economic capital from the numerator?

[@Geotubest]

Well done. Enjoyed this very much.

[@tafadzwatongs4932]

Thnk u so much ...it was helpful..how about if we are given tax

[@sgpleasure]

Multiply numerator by (1-tax rate)

[@bionicturtle]

@joserodriguez33ucv Thanks for your support, we love it!

[@joserodriguez33ucv]

Great job my friend!! Thank you very much.

[@julioautomation1332]

Thanks you very much. Please, could you add the Excel file please ?

[@mobilbear]

this is very useful, thanks a lot dude!

[@rajeshanand3263]

In one word can we say that RAROC signifies earnings over and above the risk free rate on the deployment of same capital. or is it too simplistic way of saying.

[@dabarose]

thank u for this video, it helped a lot!

[@ComfortableLate]

what about cost of capital? should it be an expense too?

[@sgpleasure]

Per De Laurentis' formula , also subtract COF from the numerator

[@user-fo9gw1hs6o]

This is amazing. Actually l think the example in frm handbook (6th edition) page 678-679 is problematic given that the deposit is 925m and the loan investment is 1000m. They are simply not matching.

[@eaglemars6123]

It is closer to reality though. Having identical loan and depo exposures is not typical in real life.

[@cyphi1]

Can I borrow $1?

[@WildHorseProductions]

Government securities returning 6.5% ? Bahahahahaha, oh how times have changed since 2008