Estimated reading time: 1 minute

 

Introduction

We present the formulas for the Operational Risk and Resiliency segment.

Note that this information may be downloaded this free of charge in PDF format.

Click here to visit our shop page.

 

Risk-Adjusted Return on Capital (RAROC)

RAROC = ( Risk Adjusted Return ) / ( Risk Adjusted Capital )

RAROC = [ Revenues – Costing – Taxation – Expected Losses + Return on Capital +/- Transfers ] / Risk Adjusted Capital

Adjusted RAROC = RAROC – β ( Market Return – Risk Free Rate )          

 

Probability of Default

Default Probability = 1 – e ^lt

We note:

l  =  (Spread) / 1 – Recovery Rate

 

Worst Case Default Rate (WCDR)

WCDR  =  N *  [  N^-1 * ( PD )  +  r^½ * N^-1   ( 0.999 )  /   ( 1 – r )^½  ]        

 

Default Correction

r_ab   =  [ p_ab  –  (  p_a  *  p_b )  ] / [ p_a * ( 1 –  p_a ) ] ^½  *  [ p_b * ( 1 –  p_b ) ] ^½                                            

 

Liquidity Cost 

Liquidity Cost = ( Notional Amount X Spread Value ) / 2

 

Summary

Thanks for reading! Be sure to try the following links for even more data:

• Our Homepage
• Additional Articles
• More About the Course
• GARP Webpage

 

Success is near,

The QuestionBank Family