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Alternative Income Measures for RAROC
- GAAP Net Income
- Statutory Net Income
- IASB Fair Value Basis Net Income
- Economic Profit
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Alternative Capital Measures for RAROC
- Not Risk-Adjusted:
- Actual Commited Capital
- Mkt Value of Equity (add franchise value)
- Risk-Adjusted:
- Regulatory Required Capital
- Rating Agency Required Capital
- Economic Capital
- Risk Capital
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Methods to determine Aggregate Risk Profile
- Incremental Allocation: calculate risk measure for aggregate, then same measure after removing one BU, difference = incremental capital requirement → will leave some portion unallocated
- Marginal allocation: eliminate $1 of revenue or E(loss) from each unit sequentially and use chg in total capital
- Myers-Read method: allocate capital so as to equalize the marginal impact that each BU has on value of Put
- Co-measure approach: establishes firmwide capital requirement using conditional risk measure, and then calculate co-measure for each BU
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