RAROC Capital for Credit Risk

[Maximus_FRM2012]

Hi David,

Looking over your notes, on page 6 of Topic 7, you have capital for credit listed as the following:
The capital factors (i.e., applied as a percentage of face value) vary based on RR and tenor.

However on page 7, for credit risk (the internal economic capital), you have the following:
The capital factor is expressed as a percentage of the position's market value.

The two seem to be referring to the same concept but one is listed as face value while the other is based on market value.

Can you please let me know if this is an error and if so which one to us. If its not an error, how would we know which to use.

Thank you.

Maximus

 

[David Harper CFA FRM]

Hi Maximus,

The page 6 looks like an error, apologies. Capital factors are typically multiplied by market value of position (I unsure whether we introduced the error on page 7 or if we inherited from text, at the moment, but i'm highly confident it should be market value consistently). Nice observation, thank you!

 

[Maximus_FRM2012]

Thank you for clarifying this.

Maximus