Lesson 4 of 25 · 6 min

Apply both

The combined damage is not the sum of the two damages, because Calder cannot fall nineteen percent twice.

Both means the other four rows fall 19 percent and Calder falls 37 percent. It does not mean you add the two previous stressed books together. Calder is in the 19 percent story and in the 37 percent story; counting it in both would charge the same shares twice.

The four non-Calder rows after a 19 percent decline are $3,396,159.90 of market value: Meridian $1,489,023, the collective $722,050.20, Oakridge $414,460.80, the government fund $770,625.90. Calder after a 37 percent decline is $1,159,203.15. The combined market value is $3,396,159.90 + $1,159,203.15 = $4,555,363.05.

Lending value follows the same split. The four rows contribute $2,132,932.10 after being scaled by 0.81. Calder contributes $405,721.10. Combined lending value is $2,538,653.20. Market LTV is $1,858,563.47 ÷ $4,555,363.05 = 40.80 percent. Headroom is $4,555,363.05 − $2,655,090.67 = $1,900,272.38, or 41.72 percent of the stressed book.

Check the addition trap. The uniform 19 percent move removed $1,146,231.05. The Calder-only 37 percent move removed $680,801.85. The sum of those two holes is $1,827,032.90. The combined stress removes $1,477,431.95. The $349,600.95 difference is 19 percent of Calder — the piece that the uniform move already took and that the single-name move must not take again. The extra Calder damage inside the combined stress is only the further 18 points: $1,840,005 × 0.18 = $331,200.90, and $1,146,231.05 + $331,200.90 = $1,477,431.95.

Key terms

Combined stress: Two different percentage moves applied in the same restatement, each to the rows it names, with no row counted twice.
Double count: Adding two stressed totals that both already include the same holding. The shared holding's decline is charged twice.
Incremental decline: The extra percentage a row takes in the combined stress beyond the uniform move. For Calder that extra is 18 points.

Worked example

Nineteen on four rows, thirty-seven on Calder

Meridian, the collective, Oakridge and the government fund multiplied by 0.81. Calder multiplied by 0.63.

Four rows after 19 percent: $3,396,159.90
Calder after 37 percent: $1,159,203.15
Combined market value: $4,555,363.05
Combined lending value: $2,538,653.20
Market LTV: 40.80%
Headroom: 41.72%

The combined book is $4,555,363.05, not the sum of the two earlier stressed books. Shared holdings are restated once.

Check yourself

The 19 percent uniform move takes $1,146,231.05 off the March book. The Calder-only 37 percent move takes $680,801.85 off. Why is the combined decline $1,477,431.95 rather than $1,827,032.90?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.