28.2 Rate-Volume Modeling

Customer demand for new products often depends on interest rates (either the absolute level of inter­est rates or the spread between two rate indices) or other variables such as macro-economic drivers. You can model this behavior by selecting a rate-volume assumption. Once you have selected the rate-volume assumption, you must incorporate additional parameters through selection of a Rate Depen­dency Pattern, which control how interest rates or economic variables affect new business levels.

Rate-Volume Assumptions

There are four rate-volume options to choose from:

• No Relationship

  If you want new business amounts to stay constant regardless to the interest rate environments, select this option.

• Rate-Level Dependent

  The Rate-Level dependent relationship allows you to change new business behavior for different values of a single indicator interest rate. The indicator interest rate, referred to as the Base Interest Rate, is defined by an Interest Rate Code, a term selection, and a rate lag.

  Interest Rate Code: The Interest Rate Code identifies the reference yield curve or rate index whose fore­casted value determines the new business amount. You can select the Interest Rate Code from all avail­able interest rate codes for the selected currency, as defined within Rate Management. The list of Interest Rate Codes includes only codes with a reference currency equivalent to the currency selected in the Floating Tree Bar.

  Term Selection: If the selected Interest Rate Code is a yield curve, you must also select a term. Your term choices depend on the definition of the Interest Rate Code within Rate Management. Note that the selection automatically defaults to the shortest available term.

  Rate Lag: If you want the base interest rate calculation to perform a look back function, you can input a rate lag. The new business assumption lookup uses the forecasted interest rates as of a date within the current modeling bucket less the rate lag.

  If the timing of new business is End of Bucket, the lookup function uses the last day of the modeling bucket less the rate lag. For all other cases, the mid-point of the bucket less the rate lag is used.

• Rate-Spread Dependent

  With the Rate-Spread dependent relationship, you can input new business assumptions for different spreads between two indicator interest rates, or a spread between two term points on the same yield curve. You define the first indicator interest rate, the Base Interest Rate, as described previously. The second indicator interest rate, the Alternate Interest Rate, also requires definition of an Interest Rate Code, a term selection, and a rate lag.

  The rate spread equals the Alternate Interest Rate minus the Base Interest Rate.

• Economic Indicator Dependent

  With the Economic Indicator Dependent relationship, you can input new business assumptions related to defined economic indices (as defined in Rate Management), where the change in the index will drive a different outcome of new business. For example, you can forecast a higher GDP and tie the new business assumptions to that particular forecast.

Rate Tiers

The Rate Tiers tab will become available to edit when one of the following three rate volume relation­ships have been selected (Rate Level, Rate Spread, and Economic Indicator). Once you have selected a rate-volume relationship and defined your base and alternate interest rates, you must define rate tiers. Rate tiers provide the lookup values for which different new business assumptions can be input.

Lookup Method

The lookup method determines which new business assumption is selected from the input values when the forecasted interest rate falls between two rate tiers.

There are two methods to choose from:

Interpolate:

Range: If you select Range, Oracle ALM selects the new business assumption as the closest assump­tion associated with the rate tier which is less than or equal to the forecasted interest rate