Chapter 11 Flashcards
what is loan migration matrix
reflects credit rating of loans and measures probability of loan upgrading or downgrading over time
what is concentration limit analysis
rules set by banks to control how much money can be loaned to a single borrower
what is large exposure limit analysis
a way for banks to monitor the amount of risk they have with any single borrower
what is the difference between concentration and exposure limit analysis
concentration: focuses on category/ certain sectors (real estate)
large exposure: focuses on company (large borrowers)
what is concentration limit formula
= max loss as% of capital * (1/loss rate)
what is minimum risk portfolio
combination of assets that gives you lowest risk possible while still earning a return
what is the formula for return of a loan
= (spread + fee) - (prob of default * potential loss cap)
what is the formula for a risk (SD)of a loan
= sqrt (prob of default * probability of not defaulting) * (potential loss cap)
what is the ERP formula
= (probability of A)(ER A) + (probability of B)(ER B)
what is the risk portfolio formula
= sqrt( ((probability of A)(SD A))^2 + ((probability of B)(SD B))^2 + 2(probability A)(probability B)(correlation)(SD A)(SD B))
what are 5 different ways to tell which loan is more risky
-less spread
-less probability of default
-less fees
-less probability loss of capital
-lower SD
defend modern portfolio theory
suggests diversifying assets, higher risk with lower risk, when one is down the other might offset losses (low correlation)