1. Asset Liability Management User Guide
  2. Forecast Rates
  3. Currency Forecast Methods

19.2 Currency Forecast Methods

The following Currency Forecast methods are available when you select a currency (other than the reporting currency) from the Currency Codes list.

Table 19-1 Currency Forecast Methods

Method Description
Flat Forecast no change in the exchange rate for all dates beginning with the as-of date.
Structured Change Forecast exchange rates as an incremental change from the previous period.
Direct Input Type exchange rates to use in forecasting.
Parity * Forecast the exchange rate between two currencies based on interest rate forecasts for the reference IRC associated with each of the currencies.
No Arbitrage * Forecast the exchange rate required to maintain a no-arbitrage condition between two currencies.

* The above methods are available when the selected currency has an associated reference IRC as defined in the Rate Management.

You can map your forecast scenario with Behavior Pattern Rule. For more information, see the Behavior Pattern Rule Mapping section.

Examples of Currency Forecasting

The following examples use the data to demonstrate currency forecast methods:

  • Reporting currency = U. S. dollars (USD is shown in the title bar)
  • Local currency = Australian dollars – (converting from Australian dollars (AUD) to USD)
  • Exchange rate loaded from Rate Manager = 1.108 AUD to 1 USD (rate in effect on the as-of date, 06/30/09)
  • Modeling period = 07/01/2009 to 06/30/2010

For all the examples, start with the following:

  1. Create a new Forecast Rates Assumption Rule with USD as the Reporting Currency.
  2. In the Forecast Rates window, add a scenario:
    1. Click Add.
    2. Type a Name for the scenario.
  3. Click Apply.

Flat Method: Calculate the exchange rate of Australian dollars to $1 U. S., modeling NO change in the exchange rate during the modeling period.

In the Forecast Rates window, follow these steps:

  1. From Currency Codes, select AUD: Australian Dollar
  2. From Currency Forecast Method, click Flat.
  3. Click View.

    Under Rate Value, see the exchange rate: $1.108 AUD s equal $1 USD. This rate is applied uniformly to all date buckets, based on the rate in effect at the As Of Date in the Application Preferences.

  4. Click OK.
  5. Click Save in Forecast Rates window.

Structured Change: Model a change in the exchange rate so that the rate increases by a total of 0.5% over four months, levels off for four months, and then drops a total of 0.25% over three months.

In the Forecast Rates window, follow these steps:

  1. From Currency Codes, select AUD: Australian Dollar.
  2. From Currency Forecast Method, select Structured Change.
  3. Click Define.
  4. Add rows using Add and enter bucket numbers and rate changes.
  5. Use the Excel Import or Export feature to add the rate changes. For more information, see the Excel Import or Export section.
  6. Click Apply.
  7. Click View to see the output table.
  8. After viewing the Currency Codes in Currency Codes Structured Change window, click OK.

  9. Click Save in Forecast Rates window.

Direct Input: Model a change in the exchange rate so that rates reflect a stronger U. S. dollar during the spring of 2010.

In the Forecast Rates window, follow these steps:

  1. From Currency Codes, select AUD: Australian Dollar.
  2. From Currency Forecast Method, select Direct Input.
  3. Click Define.
  4. Click Apply.
  5. Click View to see the output table.
  6. Use the Excel Import or Export feature to add the rate values. For more information, see the Excel Import or Export section.
  7. After viewing the Currency Codes in Currency Codes Structured Change window, click OK.
  8. Click Save in Forecast Rates window.

Parity: Model a period of rising interest rates for the U. S. and Australian dollars. Use the parity method to forecast the exchange rate of Australian dollars to $1 U. S. Parity is calculated based on the forecast interest rates of the reference IRCs of the Australian dollar and the U. S. dollar.

  1. In the Forecast Rates window, forecast changes in the U. S. dollar interest rate:
  2. From Currency Codes, select USD: US Dollar
  3. From Interest Rate Codes, select Treasury Index.
  4. From Rate Forecast Method, click Direct Input.
  5. Click Define. Enter interest rate changes for 02/01/2010 through 04/30/2010 in Currency Codes Structured Change window.
  6. Click Apply.
  7. In the Forecast Rates window, forecast changes in the Australian dollar reference interest rate.
  8. From Currency Codes, select AUD: Australian Dollar
  9. From Interest Rate Codes, select IRC AUD.
  10. From Rate Forecast Method, select Direct Input
  11. Click Define. Enter interest rate changes for 02/01/2010 through 04/30/2010 in Currency Codes Structured Change window.
  12. Click Apply.
  13. Click Save in Forecast Rates window.

The View option is not available for the parity feature. To view the results, enable the Forecast Rate option in the Audit block of ALM process window for the relevant interest rate codes. Audit results are written to the FSI_INTEREST_RATES_AUDIT table.

No Arbitrage: Forecast the exchange rates required to maintain equilibrium between the U. S. and Australian dollars. This forecast is based on the historical interest rates from the reference IRC of each currency. This example assumes that the following reference IRCs are assigned in Rate Management:

  • U. S. dollar: Treasury Index
  • Australian dollar: IRC AUD

In the Forecast Rates ID window, follow these steps:

  1. From Currency Codes, select AUD: Australian Dollar
  2. From Currency Forecast Method, select No Arbitrage.
  3. Click Save.

The View button is not available for the No Arbitrage feature. To view the results, enable the Forecast Rate option in the Audit block of the ALM Process window for the relevant Interest Rate Codes. Audit results are written to the FSI_INTEREST_RATES_AUDIT table.