By Pieter Klaassen
Managers can set up and deal with fiscal capital extra successfully once they know the way their judgements upload price to their agencies. financial Capital: the way it Works and What each supervisor must understand offers new how you can outline, degree, and enforce administration techniques through the use of contemporary examples, many from the sub-prime challenge. The authors additionally speak about the function of monetary capital in the broader context of administration obligations and actions in addition to its relation to different danger administration instruments which are to be had to the fashionable danger supervisor. Explains how you can use financial capital in balancing hazard and go back Evaluates recommendations to difficulties encountered in constructing an financial capital framework Emphasizes instinct attracts unique realization to embedding threat modelling ways inside of financial capital frameworks
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Extra resources for Economic Capital: How It Works, and What Every Manager Needs to Know
Financial Times. June 19, 2008. 17 Economic Value Added (EVA) is a registered trademark by its developer Stern Stewart & Co. 18 Matten C. Managing bank capital, capital allocation and performance measurement. 2nd ed. New York: Wiley; 2000. 19 Sharpe WF. The Sharpe ratio. The Journal of Portfolio Management. Fall. 1994. 20 Magretta J. What management is, how it works and why it’s everyone’s business. New York: The Free Press; 2002. 32 21 Economic Capital IFRI Foundation and CRO Forum. Insights from the joint IFRI/CRO forum survey on economic capital practice and applications.
2nd ed. New York: Wiley; 2000. 19 Sharpe WF. The Sharpe ratio. The Journal of Portfolio Management. Fall. 1994. 20 Magretta J. What management is, how it works and why it’s everyone’s business. New York: The Free Press; 2002. 32 21 Economic Capital IFRI Foundation and CRO Forum. Insights from the joint IFRI/CRO forum survey on economic capital practice and applications. 2007. 22 Society of Actuaries. Economic capital for life-insurance companies. February 2008. 23 American International Group Inc.
When economic profit is positive, the activity adds value to the shareholders, because the return is higher than the cost of capital. Projects or investments with a negative economic profit are expected to destroy shareholder value. In RAROC terms, investments with a RAROC above the Cost of Capital Employed generate value and vice versa. Critical in this comparison is how the Cost of Capital Employed, also known as the hurdle rate, should be determined. This will be discussed in Chapter 5. 24 Economic Capital An alternative performance measure that takes risk into account is the Sharpe ratio, named after its inventor, William Sharpe.
Economic Capital: How It Works, and What Every Manager Needs to Know by Pieter Klaassen