Economic Capital Solution

STEP 0: Pre-Calculation Summary
Formula Used
Economic Capital = Earnings at Risk/Required Rate of Return
EC = EaR/RR
This formula uses 3 Variables
Variables Used
Economic Capital - Economic Capital refers to the amount of capital that a financial institution needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk,etc.
Earnings at Risk - Earnings at Risk (EaR) is a financial risk management metric that measures the potential impact of adverse events or fluctuations on an organization's earnings.
Required Rate of Return - Required Rate of Return is the minimum return an investor expects for taking on the risk of investing in a particular asset, such as stocks or bonds.
STEP 1: Convert Input(s) to Base Unit
Earnings at Risk: 620 --> No Conversion Required
Required Rate of Return: 0.08 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
EC = EaR/RR --> 620/0.08
Evaluating ... ...
EC = 7750
STEP 3: Convert Result to Output's Unit
7750 --> No Conversion Required
FINAL ANSWER
7750 <-- Economic Capital
(Calculation completed in 00.004 seconds)

Credits

Created by Kashish Arora
Satyawati College (DU), New Delhi
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BMS College of Engineering (BMSCE), Bangalore
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Go Maximum Drawdown = ((Trough Value-Peak Value)/Peak Value)*100
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Go Modigliani-Modigliani measure = Return on Adjusted Portfolio-Return on Market Portfolio
Interest Rate Risk
Go Interest Rate Risk = (Original Price-New Price)/New Price
Sterling Ratio
Go Sterling Ratio = (Compound Annual Growth Rate/(Average Maximum Drawdown-10))*-1
Risk Tolerance
Go Risk Tolerance = (Public Equity Exposure*0.35)/Monthly Gross Income
Market Risk Premium
Go Market Risk Premium = Expected Equity Market Rate-Risk Free Rate
Basis Risk
Go Basis Risk = Future Price of contract-Spot Price of Hedged Asset
Credit Value at Risk
Go Credit Value at Risk = Worst Credit Loss-Expected Credit Loss
Economic Capital
Go Economic Capital = Earnings at Risk/Required Rate of Return
Calmar Ratio
Go Calmar Ratio = (Average Rate of Return/Maximum Drawdown)*-1
Upside/Downside Ratio
Go Upside/Downside Ratio = Advancing Issues/Declining Issues
Credit Spread
Go Credit Spread = Corporate Bond Yield-Treasury Bond Yield
Probability of Default Regression Model
Go Probability of Default = 1/(1+exp(-Linear Combination))
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Go Default Risk Premium = Interest Rate-Risk Free Rate
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Economic Capital Formula

Economic Capital = Earnings at Risk/Required Rate of Return
EC = EaR/RR

What is Economic Capital?

Economic Capital refers to the amount of capital that a financial institution or company needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk, operational risk, and liquidity risk. It represents the funds that an organization sets aside as a buffer to absorb potential losses beyond those covered by regulatory capital requirements.

How to Calculate Economic Capital?

Economic Capital calculator uses Economic Capital = Earnings at Risk/Required Rate of Return to calculate the Economic Capital, Economic Capital refers to the amount of capital that a financial institution or company needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk, operational risk, and liquidity risk. Economic Capital is denoted by EC symbol.

How to calculate Economic Capital using this online calculator? To use this online calculator for Economic Capital, enter Earnings at Risk (EaR) & Required Rate of Return (RR) and hit the calculate button. Here is how the Economic Capital calculation can be explained with given input values -> 7750 = 620/0.08.

FAQ

What is Economic Capital?
Economic Capital refers to the amount of capital that a financial institution or company needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk, operational risk, and liquidity risk and is represented as EC = EaR/RR or Economic Capital = Earnings at Risk/Required Rate of Return. Earnings at Risk (EaR) is a financial risk management metric that measures the potential impact of adverse events or fluctuations on an organization's earnings & Required Rate of Return is the minimum return an investor expects for taking on the risk of investing in a particular asset, such as stocks or bonds.
How to calculate Economic Capital?
Economic Capital refers to the amount of capital that a financial institution or company needs to hold in order to cover unexpected losses arising from various risks, such as credit risk, market risk, operational risk, and liquidity risk is calculated using Economic Capital = Earnings at Risk/Required Rate of Return. To calculate Economic Capital, you need Earnings at Risk (EaR) & Required Rate of Return (RR). With our tool, you need to enter the respective value for Earnings at Risk & Required Rate of Return and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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