17.1 Derivatives in Stochastic Processes

The following matrix gives the mapping of the user selection to the table populated by the Cash Flow Engine (CFE). The same is used for populating the off-balance-sheet products as well.

Table 17-1 List of Derivatives in Stochastic Processes

Table	VaR selection	EaR selection	Market Value selection	Monthly Rate sselection
FSI_O_STOCH_TOT_VAR	Yes
FSI_O_STOCH_VAR	Yes
FSI_O_STOCH_MKT_VAL			Yes
EAR_LEAF_AVG_XXXXX		Yes
EAR_LEAF_DTL_XXXXX		Yes
EAR_TOTAL_DTL_XXXXX		Yes
EAR_TOTAL_AVG_XXXXX		Yes
FSI_INTEREST_RATES_AUDIT				Yes

1. Specifically for all the derivative swaps, the above-mentioned tables are populated. A new column leg type outputs the results for the leaf level tables. The list of products are:
   • Vanilla Swap
   • Basis Swap
   • Set in arrears Swap
   • Amortizing Swap
   • Asset Swap
   • Forward Swap
   • Currency Swap
   • FRA
   • Interest Rate Collars
   • Interest-Rate Caps
   • Interest Rate Floors
   • Spot/Forward Forex
2. Leaf level VaR outputs the values at the leg level. The outputs are positive for both payable and receivable while the Total VaR output considers the payable as negative and receivable as positive and hence writes the netted value. One exception is Collars where currently Leg Type 1 is Cap and 2 is Floor. Here, signage is attached at the cashflow level for the interest income based on the purchase-sale logic and the cap/floor indicator. So, leaf VaR outputs as such while the cap/floor values are aggregated for Total VaR. VaR for Cap and Floor instruments also are output along with the signage representing the inflow/outflow.
3. Leaf level EaR values output at the leg level. The outputs are positive for both payable and receivable legs while the Total EaR output considers the payable as negative and receivable as positive and hence writes the netted value. One exception is Collars where currently Leg Type 1 is Cap and 2 is Floor. Here, signage is attached at the cashflow level for the interest income based on the purchase-sale logic and the cap/floor indicator. So, leaf EaR is output as such and the cap/floor values are aggregated for Total EaR. The EaR for Cap and Floor instruments are output along with the signage representing the inflow/outflow.
4. Leaf Average EaR values are output at the level taking the simple average of the Leaf EaR values across the scenarios. Similarly, Total average values are output taking the simple average of the scenarios for all the leaves.
5. Earnings are equivalent to net interest accrued.
6. Net Interest Income is the interest income less than the interest expense. CFE considers interest accrued of assets and liabilities to arrive at the net interest income. Net Income is the interest income and non-interest income combined less the interest expense and non-interest expense. CFE considers interest accrued of all the account type products as explained in the preceding sections.
7. In the case of futures, the Aggregation of instruments is based on the LEG_TYPE in the instrument record. LEG_TYPE = 1 means it is a short position and LEG_TYPE = 2 means it is a long position.

   Long position (Buy) Instrument Records would have positive financial measures.

   Short position (Sell) Instrument Records would have negative financial measures

8. The user needs to provide different COMMON_COA_ID's for long and short positions so that the ALM aggregation logic does not net the long/short positions. ALM BI would handle the necessary aggregation for the long/short positions for reporting.
9. For futures in Stochastic Process, the Consolidation Logic is as follows: 10. Market Value and CUR_PAR_BAL is aggregated with the LEG_TYPE, so buys and sells net out.