8.18.5 Cash Flow: Duration
The Duration method uses the Macaulay Duration formula.
Figure 8-7 Macaulay 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 Asset Liability Management 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 can directly input when 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.
You 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.
- The Remaining term to cash flow is the difference between the date of each cash flow
andthe modeling start date for that instrument.
The Duration TP 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.