Lesson 10 of 25 · 6 min

Compute headroom in percent

A 19 percent decline consumes 10.32 points of headroom, not 19, because the trigger is a fixed dollar figure sitting still.

Headroom in percent is dollar headroom divided by current market value. It is the further decline, from today's stressed prices, that would take the book exactly to the trigger. It is not the decline already applied, and it is not 100 percent minus LTV.

March close: $3,377,704.33 ÷ $6,032,795 = 55.99 percent. After the 19 percent uniform move: $2,231,473.28 ÷ $4,886,563.95 = 45.67 percent. The book fell 19 percent and headroom fell 10.32 points. The two percentages are different quantities. One is a change in the market value. The other is the surviving surplus as a share of the new, smaller market value.

The other books: Calder-only 37 percent leaves $2,696,902.48 ÷ $5,351,993.15 = 50.39 percent. Both moves leave $1,900,272.38 ÷ $4,555,363.05 = 41.72 percent. The 60 percent book leaves −$241,972.67 ÷ $2,413,118.00 = −10.03 percent, which is the shortfall stated as a share of the broken book.

The 10.32-point drop from 55.99 to 45.67 is the shape Track 1 lesson 7 called non-linear decay, visible here without any further theory. The trigger did not move. The denominator shrank. Each remaining dollar of surplus is a larger share of a smaller book than it would have been, which is why a 19 percent price move cannot consume 19 points of headroom unless the trigger is zero.

Key terms

Percentage headroom: Dollar headroom divided by current market value. The further percentage decline that reaches the trigger from here.
Points versus percent: Headroom falling from 55.99 percent to 45.67 percent is a drop of 10.32 points, not a 10.32 percent decline in the book.
Non-linear decay: The property that a price decline consumes fewer points of headroom than its own size, because the trigger is a fixed dollar amount.

Worked example

The same surplus, restated as a share of each book

Trigger $2,655,090.67 in every row. Percentage headroom is dollar headroom divided by that row's market value.

March close: 55.99%
Uniform 19 percent: 45.67%
Calder −37 percent: 50.39%
Both: 41.72%
Uniform 60 percent: −10.03%

Percentage headroom is a remaining-decline figure, not a restatement of the move you just applied.

Check yourself

March headroom is 55.99 percent. After a 19 percent decline it is 45.67 percent. Why did a 19 percent price move consume 10.32 points of headroom rather than 19?

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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.