ABC Bank lends $10MM floating rate for one year to PQR Corp a BBB rated borrower. It charges 1% of credit spread p.a. The fee income is 5 bps and the operating cost is 5 bps as well. The Probability of default of PQR over one year is estimated at 0.25% and recovery rate (R) is 40% i.e. if PQR defaults ABC losses $100X (1-R)= $60.

Also assume that the unexpected losses calculated by the firm using a Credit VaR model is 2.50% of the lent amount i.e. $250,000.

ABC Banks hurdle rate (cost of funding) is 15%.

Calculate ABC Bank's RAROC and also decide whether the Bank should accept the project.

	A.	RAROC is 45%, Accept the Project.
	B.	RAROC is 34%, Accept the Project
	C.	RAROC is 10%, Reject the Project
	D.	RAROC is 18%, Select the Project