Risk Adjusted Pricing

[harsh092]

I have been reading Du Laurentis el al. Chapter 2 where it states, "As VaR increases, so does the expectation of higher returns and economic capital. The cost of capital multiplied by VaR needs to be incorporated into lending decisions as a cost for banks that are price takers, or as a lending cost (to be included in credit spreads) for banks that are price setters."

Can anyone please explain what do they mean by price takers and setters, and how would be lending cost determined by including credit spreads?

 

[Nicole Seaman]

I have been reading Du Laurentis el al. Chapter 2 where it states, "As VaR increases, so does the expectation of higher returns and economic capital. The cost of capital multiplied by VaR needs to be incorporated into lending decisions as a cost for banks that are price takers, or as a lending cost (to be included in credit spreads) for banks that are price setters."

Can anyone please explain what do they mean by price takers and setters, and how would be lending cost determined by including credit spreads?

Hello @harsh092

Welcome to the forum! I moved your thread to the Credit Risk section of the forum, as the study groups sections are for members who are looking for study groups. I also wanted to make sure that you are aware of our search and tag functions in the forum. We ask that everyone try to search the forum for answers to their questions before posting. Many times, your question has been answered already, as we have over a decade of FRM discussions in the forum!