International Capital Budgeting Issues Involved in Overseas Projects
Capital budgeting is an essential function for any business planning new investments, and it becomes particularly complex when undertaken in an international context. For banks and financial institutions engaged in or advising on overseas projects, understanding the unique international capital budgeting issues is critical to making informed investment decisions that enhance shareholder value while managing…
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Contingency Planning: A Proactive Approach to Risk Management
Contingency planning is a proactive strategy designed to prepare organizations for unexpected events by developing alternative courses of action. It involves systematically identifying potential risks, assessing their possible impacts, and formulating detailed plans to mitigate or respond to those risks should they materialize. Effective contingency planning enhances an organization’s ability to respond to disruptions efficiently,…
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Economic Capital and RAROC: Tools for Risk Management and Performance Evaluation
Risk-Adjusted Return on Capital (RAROC) is defined as the ratio of risk-adjusted return to economic capital (EC). Economic capital refers to the amount of capital that a bank or financial institution needs to ensure its survival in extreme, worst-case scenarios. It acts as a financial buffer against unexpected shocks in market conditions. Banks must assess…
Read article Risk Aggregation and Capital Allocation: Concepts and Strategic Importance
Risk Aggregation: An Overview Risk aggregation refers to the systematic process of combining various individual risks to assess the total risk exposure of an organization. This process involves identifying and quantifying distinct risk types—such as credit, market, operational, and liquidity risks—and analyzing their interdependencies. The goal is to derive a consolidated risk profile that supports…
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RAROC and Profit Planning in Banking
Risk-Adjusted Return on Capital (RAROC) is a risk-based profitability measurement framework that evaluates financial performance on a risk-adjusted basis. It provides a consistent metric to assess profitability across different business lines and asset classes, enabling better capital allocation and pricing decisions. RBI Guidelines on Asset Acquisition and Pricing As per the Reserve Bank of India…
Impact of Interest Rate Risk on Banks and Financial Instruments
Overview of Interest Rate Risk Interest rate risk refers to the potential for financial loss due to unexpected changes in market interest rates. This risk is particularly relevant for fixed-income securities, such as bonds, where fluctuations in interest rates can significantly affect market valuations. Specifically, when interest rates rise, the market value of existing fixed-income…
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