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WK 8: Ch 9: Credit Portfolio Management, Homework Qs, WK 8: Ch10: Economic…

- - - - acquisition of the exposure by CPM is executed at market price, irrespective of the amount that the business units obtained from the client
      - Internally calculated cost needs to be compared to the market price
        
        If it is less = good deal
        
        it is is more = no deal --> underpricing the transaction
    - - all cost are considered including cost of capital
    - - Client is charged 3% on $100m loan
        
        CPM buys the exposure from orginiation unit and demands to be paid market price of 3.5
        
        Shortfall revenue is 0.5% of $500,000 per year --> absorbed by the P&L of origination unit
        
        CPM receives its needed 3/5%
        
        In this way, if the institution needs to shed the exposure and sells the loan to the market, or hedges it, it has priced-in this cost
        
        To the extent that market pricing does not move against the firm, CPM is made whole
  - - - Avoids insider trading
- - - - largest absolute exposures, largest weak exposures, deterioration/improvement of credit worthiness with corresponding exposures, large new transactions, breakdown by products and business units
  - - - i.e.Need to consider what happens if different loans to the same client industry are being originated from different locations
      - need a mechanism where info is centralized
        
        groups all exposures
    - - consolidate exposures based on the ultimate parent company and on all its subsidiaries
  - - - Set in advance and changed infrequently
      - Enforced properly --> cant go over limit
      - Subject to judgment and review
      - Set for multiple exposure metrics
- - - - the extra capital needed for the total portfolio relative to the "except for one" portfolio is the capital required for this one transaction
    - - help negotiate if knows the transactions' total cost on a fully loaded basis
      - prioritise transactions: helps allocate resources, allowing transactions with low profitability to be minimised in favour of transaction with high profitability
  - - - speed at which capital is redeployed to new transactions