Question

You are a Derivatives Trader at a major Broker-Dealer. At the end of the week you need to calculate and submit several capital ratios for the performance of your business. You consolidate all trading activity across counterparties and asset types. You are deploying standardized metrics to calculate Risk Weighted Assets (RWA). Below are the standardized risk weights for various asset types:

i. Cash, US Treasuries (0%)

ii. US Bank issued paper and FHA, Fannie Mae, Freddie Mac issued paper (20%)

iii. Corporate bonds, notes and other corporate liabilities (100%)

iv. Structured Securities (100%)

v. Other paper (100%)Your holdings book/balance sheet looks as follows:

Cash=$400K, T-Bills=$20M, Verizon Bonds=$25M, East-West Imports Promissory Note=$5M, Uncollateralized Derivatives with JP Morgan=$250M, fully Collateralized (US Treasury collateral) Derivatives with JPMorgan=$50M, CRE Senior Note=$30M. Your weekly Net P&L=$8M. Calculate

1) RWA

2) Return on RWA

Recalculate (1) and (2) in case the US Treasury collateral in the collateralized trades with JPMorgan is

replaced with Mortgage collateral.

Answer 1

To calculate total risk, mutilpy each asset with the risky weight it carries.
Divide Total risky assets by total assets to calculate the RWA
				In $ '000
Particulars		Assets	Risk Weightage	Risky Assets
Cash		400	0%	-
T-bills		20,000	20%	4,000
Verizon Bonds		25,000	100%	25,000
East-west Imports Promissory Note		5,000	100%	5,000
Uncollateriazed Derivates		2,50,000	100%	2,50,000
Collateriazed Derivates		50,000	100%	50,000
CRE Senior Notes		30,000	100%	30,000
Total		3,80,400		3,64,000
RWA	=	3,64,000
		3,80,400
RWA	=	96%
Return on RWA	=	Net P&L ( In $ '000)
		Rsiky Assets
	=	8000
		3,64,000
Return on RWA	=	2.20%