Lesson 11 of 25 · 5 min

Compute the shortfall when headroom goes negative

Sixty percent takes the book $241,972.67 through the trigger, and that gap is the shortfall.

A shortfall is negative headroom with the sign flipped. When market value sits below the trigger, the test has failed by the difference. On this facility that difference is trigger minus stressed market value. Above the line the same subtraction is just unused room, and the page does not print a shortfall for unused room.

shortfall = max(trigger − market value, 0)

shortfall: How far the book sits under the trigger. Zero when the book is above it.
trigger: $2,655,090.67 on every price stress in this track, until the balance moves.
market value: The stressed sum of the rows.

The 60 percent uniform move is the case that produces one. Market value is $6,032,795 × 0.40 = $2,413,118.00. The trigger is $2,655,090.67. The shortfall is $2,655,090.67 − $2,413,118.00 = $241,972.67. The same figure is the absolute value of the dollar headroom from two lessons ago.

The other three stresses produce a shortfall of $0, because each of them still has market value above $2,655,090.67. A shortfall is not a mood about how large the decline looked. A 37 percent hole in Calder produced no shortfall. A 60 percent hole in every row produced $241,972.67. The only input to the definition is which side of the trigger the book is on, and by how many dollars. The next lesson turns that $241,972.67 into a sale; this lesson stops at the gap. A percentage decline names a path; a shortfall names a distance past a line, and only the second figure enters the cure arithmetic.

Key terms

Shortfall: Trigger minus market value when that difference is positive; otherwise zero. The dollar gap the failed test reports.
Failed test: The state in which current collateral value is below the trigger. On this facility, market value below $2,655,090.67.
Uniform 60 percent: Every March row multiplied by 0.40. The stress in this track that produces a shortfall.

Worked example

The one stress that crosses the line

Every row multiplied by 0.40. Balance $1,858,563.47. Trigger $2,655,090.67.

Stressed market value: $2,413,118.00
Trigger: $2,655,090.67
Dollar headroom: −$241,972.67
Shortfall: $241,972.67
Shortfall on the other three stresses: $0

The shortfall is a subtraction against the trigger, not a percentage of the decline. Only one of the four books has one.

Check yourself

After a 60 percent decline, market value is $2,413,118.00 and the trigger is $2,655,090.67. What is the shortfall, and what is the shortfall after the combined 19-and-37 stress?

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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.