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The bank you work for has a RAROC model. The RAROC model, computed for each specific activity, measures the ratio of the expected yearly net income to the yearly VAR risk estimate. You are asked to estimate the RAROC of its $500 million loan business. The average interest rate is 10%. All loans have the same probability of default of 2% with a loss given default of 50%. Operating costs are $10 million. The funding cost of the business is $30 million. RAROC is estimated using a credit-VAR for loan businesses, in this case, 7.5%. The economic capital is invested and earns 6%. The RAROC is:
A. 19.33%
B. 46.00%
C. 32.67%
D. 13.33%
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