Lesson 6 of 25 · 6 min
Recompute blended after the move
A uniform decline leaves the blend unchanged; a single-name decline raises it, because the cheapest collateral shrinks.
The blended advance rate is lending value divided by market value. On the March close it is $3,277,251.25 ÷ $6,032,795 = 54.32 percent. After a stress you compute it again from the new pair of totals. The surprising result is that it does not always fall when prices fall.
After the 19 percent uniform move the blend is $2,654,573.52 ÷ $4,886,563.95 = 54.32 percent. Identical. A common factor cancels. After the 60 percent uniform move it is $1,310,900.50 ÷ $2,413,118 = 54.32 percent again. Any decline that hits every row in the same proportion leaves the weights, and therefore the blend, where they were.
The Calder-only 37 percent move is not like that. Lending value is $3,038,970.60 and market value is $5,351,993.15, so the blend is 56.78 percent — two and a half points higher than March. Calder carried a 35 percent advance rate, the lowest on the schedule. Shrinking the cheapest collateral raises the average of what remains.
The combined stress sits in between: $2,538,653.20 ÷ $4,555,363.05 = 55.73 percent. Calder has been cut harder than the other rows, so the blend rises, but the other rows have been cut too, so it does not rise as far as the Calder-only case. The blend is a weighted average. A stress changes the blend only when it changes the weights.
Key terms
- Blended advance rate
- Lending value divided by market value. The average advance rate across the pledged rows, weighted by their current market values.
- Weight shift
- A change in each row's share of the book. A single-name decline shifts weight away from that name and onto every other row.
- Cheap collateral
- A row whose advance rate sits below the blend. Shrinking it raises the blend; shrinking an expensive row lowers it.
Worked example
Three stresses, three blends
March blend 54.32 percent. Same advance-rate schedule in every case.
- Uniform 19 percent
- 54.32%
- Uniform 60 percent
- 54.32%
- Calder only, −37 percent
- 56.78%
- Both moves
- 55.73%
- What moved the blend
- The weights
$2,654,573.52 ÷ $4,886,563.95.
$1,310,900.50 ÷ $2,413,118.
$3,038,970.60 ÷ $5,351,993.15.
$2,538,653.20 ÷ $4,555,363.05.
Not the advance rates.
The blend is silent under a uniform move and talkative under a concentrated one. A rising blend can be the residue of the worst row shrinking.
Check yourself
After Calder alone falls 37 percent, lending value is $3,038,970.60 and market value is $5,351,993.15. What is the blended advance rate, and why is it higher than March's 54.32 percent?
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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.