1. Cash Flow Engine Reference Guide
  2. Rate Conversion
  3. Rate Format Usage
  4. Funds Transfer Pricing
  5. Cash Flow Methods

11.2.6.2 Cash Flow Methods

There are four Cash Flow methods:

  • Weighted Average Term
  • Average Life
  • Duration
  • Zero-Coupon

Weighted Average Term: Weighted Average Term calculates the cash flows over the funding period, treating the next repricing date as the maturity date. The cash flows are discounted by the current net rate. The discounted cash flow at each payment/maturity is used as the weighting factor for the rate from the transfer pricing yield curve. The term from the origination to the cash flow date is used as the term for the lookup to the transfer pricing yield curve.

For this method, the transfer pricing yield curve is assumed to be in the proper rate format. No adjustment will be made to the current net rate or the transfer pricing yield curve.

Average Life: The average life method calculates the average life by taking the cash flows over the funding period and calculating average life for the series of cash flows. The computed average life of the cash flows is used as the term for the lookup to the transfer pricing yield curve.

For this method, the transfer pricing yield curve is assumed to be in the proper format. No adjustment will be made to the current net rate.

Duration: The duration method calculates the duration by taking the cash flows over the funding period and calculating the duration for the series of cash flows. The current net rate is used as the discount rate.

The duration of the cash flows is used as the term for the lookup to the transfer The duration of the cash flows is used as the term for the lookup to the transfer pricing yield curve. For this method, the transfer pricing yield curve is assumed to be in the proper format. No adjustment will be made to the current net rate.

Zero Discount Factors: The zero discount factor method must calculate discount factors for the transfer pricing yield curve. If the transfer pricing yield curve is stored as yield-to-maturity rates, the rates must first be translated into zero-coupon yields so that the discount factor can be calculated from them. If the transfer pricing yield curve is already in zero-coupon yield format, then discount factors can be calculated directly from the rates.