MANAGEMENT

Detailed explanation-1: -Risk-adjusted return on capital (RAROC) is a risk-adjusted measure of the return on investment. It does this by accounting for any expected losses and income generated by capital, with the assumption that riskier projects should be accompanied by higher expected returns.

Detailed explanation-2: -Banks utilize RAROC (risk-adjusted return on capital), a risk-based profitability measurement, to assess the efficiency of their business relationships with corporations.

Detailed explanation-3: -Equations for RAROC Analysis. The risk-adjusted return on capital is calculated as follows: Risk-adjusted return on capital = (Revenues-costs-expected losses) / Economic capital.

Detailed explanation-4: -Risk-adjusted return on capital (RAROC) is usually defined as the ratio of risk-adjusted return to economic capital. In this calculation, instead of adjusting the risk of the capital itself, it is the risk of the return that is quantified and measured.

Detailed explanation-5: -RAROC: Example Customer A, a borrower, takes a loan of $100 million from Bank XYZ, and that becomes the bank’s EAD. We also assume that the bank requests collateral worth $30 million. Customer A’s PD is determined by evaluating the credit aspects, and an assumed rate of 99% is being considered.