Capital asset pricing model and Herstatt risk: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Add TOC)
 
imported>Doug Williamson
(Layout.)
 
Line 1: Line 1:
(CAPM).
''Continuous linked settlement''


The capital asset pricing model links the expected rates of return on traded assets with their relative levels of market risk (beta).  
Foreign exchange settlement risk caused by delays arising from time-zone differences.


The model’s uses include estimating a firm’s market cost of equity from its beta and the prevailing theoretical market risk-free rate of return.
Named after Herstatt Bank, which went into compulsory liquidation in 1974, having received funds but not paid out under a number of significant intra-day cross-border transactions.


The CAPM assumes a straight-line relationship between the beta of a traded asset and the expected rate of return on the asset.




__TOC__
== See also ==
 
* [[Continuous linked settlement ]]  (CLS)
 
* [[Foreign exchange settlement risk]]
==CAPM calculation==
* [[Payments and payment systems]]
 
Expressed as a formula:
 
Re = Rf + beta x ( Rm - Rf )
 
 
Where:
 
Re = return on security.
 
Rf = theoretical [[risk free rate of return]].
 
Beta = relative market risk.
 
Rm = average expected rate of return on the market.
 
 
<span style="color:#4B0082">'''Example'''</span>
 
Rf = theoretical risk free rate of return = 4%.
 
Beta = relative market risk = 1.2.
 
Rm = average expected rate of return on the market = 9%.
 
 
Return on security (Re):
 
= 4 + 1.2 x ( 9 - 4 )
 
= 10%.
 
This investment requires an expected <u>rate of return</u> of 10%, higher than average rate of return on the market as a whole of only 9%, because its market <u>risk</u> (measured by beta = 1.2) is greater than the average market risk of only 1.0.
 
 
Under the capital asset pricing model only the (undiversifiable) market risk of securities is rewarded with additional returns, because the model assumes that rational market participants have all fully diversified away all specific risk within their investment portfolios.
 




== Use of the CAPM to quantify cost of equity ==
== '''Other links''' ==


When the CAPM is used to calculate an estimate of the cost of equity, it is conventionally expressed as:
* A comprehensive historical account of the Herstatt crisis by Emmanuel Mourlon-Druol is available here[http://tiny.cc/8ct73x].


Ke = Rf + beta x ( Rm - Rf )
''‘Trust is good, control is better': The 1974 Herstatt Bank Crisis and its Implications for International Regulatory Reform, Emmanuel Mourlon-Druol,


Where:
''Business History, Vol. 57, Iss. 2, 2015, ISSN 0007-6791 (Print), 1743-7938 (Online).''''
 
Ke = cost of equity.
 
 
== See also ==
* [[Beta]]
* [[Business risk]]
* [[Capital gain]]
* [[CertFMM]]
* [[Cost of equity]]
* [[Equity beta]]
* [[Equity risk]]
* [[Equity risk premium]]
* [[Financial risk]]
* [[Market risk]]
* [[Market risk premium]]
* [[Modern Portfolio Theory]]
* [[Risk]]
* [[Security Market Line]]
* [[Specific risk]]
* [[Systematic risk]]


[[Category:Corporate_finance]]
[[Category:Financial_risk_management]]

Revision as of 19:36, 26 June 2022

Continuous linked settlement

Foreign exchange settlement risk caused by delays arising from time-zone differences.

Named after Herstatt Bank, which went into compulsory liquidation in 1974, having received funds but not paid out under a number of significant intra-day cross-border transactions.


See also


Other links

  • A comprehensive historical account of the Herstatt crisis by Emmanuel Mourlon-Druol is available here[1].

‘Trust is good, control is better': The 1974 Herstatt Bank Crisis and its Implications for International Regulatory Reform, Emmanuel Mourlon-Druol,

Business History, Vol. 57, Iss. 2, 2015, ISSN 0007-6791 (Print), 1743-7938 (Online).''

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=Capital_asset_pricing_model&oldid=24769’