8.2.4 Structured Approach to Defining Rate Scenarios

Structured testing of alternative rate environments is key to a strong What-If analysis process. The model provides numerous utilities for defining and quality controlling rate scenarios. Because rate scenario modeling assumptions can be saved as patterns in Forecast Rate Scenario Rules, the typical burden of quality controlling rate scenarios are dramatically reduced. Once a pattern of rate shocks, spread changes, or yield curve rotations (or combination of the above) is defined, it can be saved as a Forecast Rate assumption rule to be used again and again. When data are updated in the model, all you must do is update the base position of key market rates. The change pattern in an assumption rule can be applied and the forecast rate assumptions are automatically updated. It can also easily be cloned and modified to be saved as another Forecast Rate assumption rule. This approach for defining rate scenarios is ideally suited for testing numerous rate environments in a controlled fashion.