March 2002
Intermediate to advanced
176 pages
3h 48m
English
book
Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
by Jean Dermine, Youssef F. Bissada
Content preview from Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
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Solution to Stage Four
| 1: |  The allocated profit after tax of the corporate banking division is $4 million. An equity of $20 million has been allocated to this profit centre.
Compute the RAROC, the cost of equity and the EP, knowing that the risk-free rate on government bonds is 10% and that the market demands a risk premium of 5% on bank shares. Solutions are:
Golden rule for value creation Value is created by the corporate banking unit whenever the RAROC of 20% exceeds the cost of equity of 15%, or when the EP of $1 million is positive. |
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