Leverage and Model risk: Difference between pages

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1.
The risk of financial loss or other adverse effects as a result of the misuse of a model.  
 
Debt divided by Debt plus Equity = D / ( D + E ).
 
 
'''Example'''
 
If the amounts of debt and equity were equal, then leverage under this definition would be calculated as:
 
1 / ( 1 + 1 ) = 50%.
 
 
2.
 
Gearing.
 
Leverage is based on the same inputs, but the calculation would be:
 
1 / 1 = 100%.
 
 
3.
 
To increase the level of gearing in an operational or financial structure. 
 
The intention of leveraging is to improve expected net results. 
 
The consequence of leveraging is normally to increase financial risk.
 
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods.
 


== See also ==
== See also ==
* [[Debt]]
* [[Model]]
* [[Deleverage]]
* [[Spreadsheet risk]]
* [[Gearing]]
* [[Leverage ratio]]
 
 
===Other links===
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012]


[[Category:Corporate_finance]]
[[Category:Business_and_Operational_Risk]]
[[Category:Managing_Risk]]

Revision as of 21:08, 8 December 2013

The risk of financial loss or other adverse effects as a result of the misuse of a model.

See also