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Defend Earth from alien invaders
JPM's Risk Metrics Model
How much can the FI potentially lose should market conditions move adversely
Estimated potential loss under adverse circumstances
Daily Earnings at risk
$ market value of position X price volatility
price sensitivity x adverse daily yield move
Qualitative Models Default risk
-Leverage or capital structure (D/E) threshold beyond which probability of default increases
-Volatility of earnings (stable v.s. high tech)
Reputation, long term relationship, implicit contracts
Assume risk neutrality
the FI would be indifferent between the corporate and the treasury of same maturity discount bonds
Risk adjusted return on capital, RAROC is the ratio of loan income to loan risk. A loan is approved if RAROC exceeds a FI estabilished benchmark rate (cost of capital, ROE)
Measures a loans probability of being upgraded, down graded or defaulting over a period of time. Historic data is used, and can be used as a benchmark against credit migration patterns of any new pool of loans can be compared.
Common before WW2 Bonds
Common since WW2 bank loans
The amount the bank gives up in present value terms as a result of a MYRA
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