Lesson 25 of 25 · 8 min
What a stress cannot tell you
A stress is a second statement with different prices, and a statement does not know whether anyone will wait.
A stress replaces selected inputs and reruns the arithmetic. Everything it can tell you is a restated figure: a market value, a lending value, an LTV, a headroom, a shortfall, a sale. Everything it cannot tell you is anything that is not an input to those figures.
What the March restatement does not contain, and cannot be made to contain by changing a price:
- Whether the lender treats the 70 percent test as a window or as a right to act on the same session.
- Whether the five last prices are still tradable in the size of the sale to cure once the book is falling.
- Whether Calder's advance rate stays at 35 percent, or 20, on the afternoon the price is also falling.
- Whether the other four rows stay put while Calder walks from $593.55 to $368.17.
- Whether the next nineteen days accrue at 7.22 percent or at a reset the statement has not yet printed.
- Which tax lots a sale of $806,575.57 would close, and in which year the gain would land.
The 19-day path showed an unreachable Calder trigger only on the assumption that $4,192,790 of other collateral did not move. The sequence lessons showed two leftover books the moment a sale sat between shocks. The haircut lessons showed a quarter-million-dollar lending-value hole that the operative test reported as nothing. Each of those is a fact about the arithmetic. None of them is a fact about what a counterparty will do with the arithmetic.
The one-page stress is complete as arithmetic and incomplete as a description of the next month. Completeness of the first kind is the reason to build it: every figure on it can be checked against the document above. Incompleteness of the second kind is the reason not to read it as a forecast. A forecast has a probability. A stress has a denominator.
The useful reading of a stress is the same reading this track began with. It is a second statement. It is not a mood, and it is not a map of what happens next.
Key terms
- Restated figure
- A number obtained by replacing an input and rerunning a formula. The only kind of output a stress produces.
- Counterparty action
- What the lender does with a failed or passing test — wait, call, sell, revise a rate. Not an input to the restatement.
- Forecast
- A claim about what will happen, carrying a probability. A stress does not carry one, and adding one turns it into something else.
Worked example
Four things the 60 percent column states, and four it does not
Uniform 60 percent column: market value $2,413,118.00, shortfall $241,972.67, sale $806,575.57, multiple 3.333….
- Stated: the book is through the trigger
- By $241,972.67
- Stated: closing that gap by selling collateral
- $806,575.57
- Not stated: whether that sale fills near last prices
- Not an input
- Not stated: which row is sold
- Lesson 14 showed the leftover books differ.
- Not stated: whether nineteen more days of interest run first
- Trigger would already be $2,665,208.04.
- Not stated: whether the lender waits for a window
- The agreement names a right, not a mood.
The column is exact about the gap and silent about the next action. Exactness and silence are different kinds of completeness.
Check yourself
The 60 percent column prints a shortfall of $241,972.67 and a sale of $806,575.57. Which of those two figures is a restated input from the March statement, and what does the column not state about the sale?
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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.