What will be the overall RAROC if the bank acquires the new business?

The retail banking business of BankGamma has an expected P & L of $50 million and a VaR of $100 million. The bank seeks to diversify its revenue, and is considering the opportunity to acquire a credit card business with an expected P & L of $50 million and a VaR of $150 million.

What will be the overall RAROC if the bank acquires the new business?
A . 33.3%.
B . 50%.
C . 58%.
D . 72%.

View Answer

Answer: A

Explanation:

To calculate the overall RAROC after acquiring the new business:

Expected P&L (Profit and Loss): $50?million+$50?million=$100?million$50 , ext{million} + $50 , ext{million} = $100 , ext{million}$50million+$50million=$100million

VaR (Value at Risk): Assuming diversification benefits are not considered, the total VaR would be $100?million+$150?million=$250?million$100 , ext{million} + $150 , ext{million} = $250 , ext{million}$100million+$150million=$250million

RAROC Calculation: rac{ ext{Expected P&L}}{ ext{VaR}} = rac{100 , ext{million}}{250 , ext{million}} = 0.4 or 40%

Thus, the closest answer from the provided options is 33.3%.