31.5 Cash Flow: Duration

The Duration Method uses the Macaulay Duration Formula:

Figure 31-8 Cash Flow: Duration Formula

In this formula:

• N: Total number of payments from Start Date until the earlier of repricing or maturity
• CFn: Cash Flow (such as Regular Principal, Prepayments, and Interest) in period n
• r: Periodic Rate (Current Rate/Payments per year)
• m: Remaining term to Cash Flow/Active Payment Frequency
• tn: Remaining term to Cash Flow n, expressed in years

Oracle Funds Transfer Pricing Cloud Service derives the Macaulay duration based on the Cash Flows of an instrument as determined by the characteristics specified in the Instrument Table and using your specified Prepayment Rate, if applicable. The Duration Formula calculates a single term, that is, a point on the yield curve used to transfer price the instrument.

• Within the Duration Calculation, the discount rate or current rate, r, is defined in one of three ways, based on how the methodology is set up by the user:
• The current rate is defined as the Current Net Rate if the processing option, "Model with Gross Rates" is not selected and the Current Gross Rate if the option is selected. The current rate is used as a constant discount rate for each cash flow.
• The user may directly input while defining the TP Rule, a constant rate to use for discounts. If specified, this rate is used as a constant discount rate for each flow.
• The user can select to discount the Cash Flows using spot rates from a selected Interest Rate Curve. With this approach, a discount rate is read from the selected interest rate curve corresponding to the term of each cash flow.

Note:

NOTE: The Duration Transfer Pricing Method provides the option to Output the result of the calculation to the instrument record (TP_DURATION). This can be a useful option if you would like to refer to the duration as a reference term within an Adjustment Rule.

Figure 31-9 Cash Flow: Duration

Users also have the choice to populate the TP_DURATION column directly with a value computed outside of Oracle Funds Transfer Pricing Cloud Service. If this value is populated, the FTP engine reads the TP_DURATION and will look up the FTP Rate for the given term. In this case, the TP Engine does not generate Cash Flows and will not re-compute the DURATION. It simply uses the value that has been provided and look up the appropriate FTP Rate from the specified TP Interest Rate Curve.