Ciskei Commercial Bank has a credit portfolio of R7.5 bn, with an averageportfolio default probability (PD) of 1.2%. The net income or margin is2.7%. If the portfolio collapses, about 45% of recovery can happen.Therefore, the maximum loss would be R4.125 bn (55% x 7.5 bn). Hence,the outcome shows a gain of roughly R202.5 m versus a loss of R4.125 bn.Ciskei Commercial Bank maintains a 10% capital adequacy ratio and theportfolio exposure (RWA) is R7.5 bn. Based on the Kelly Criterion, howmuch capital buffer should Ciskei Commercial Bank maintain?

To calculate the capital buffer Ciskei Commercial Bank should hold, derivable from the Kelly…

Answered: Ciskei Commercial Bank has a credit…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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D6)
Ef 629.
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