16.1 Features of Historical Simulation

The Cash Flow Engine (CFE) supports up to 2,100 rate paths.

When User runs Historical Simulation, and if User has entered ‘Number of Rate Path’ in Processing Parameters block, as value 10, CFE would need 10 days of Historical Rates, from as of date, defined for Interest Rate Code selected as Valuation Curve (for Reporting Currency) in Stochastic Rate Index rule. For Monte Carlo Simulation, CFE would generate several rate path(s), using user input in ‘Number of Rate Path’.

1. CFE would calculate and store monthly rates for 360 months for all scenarios, for all Term Points, for Valuation Curve.

   For Historical Simulation, CFE uses Historical Spot rates to calculate monthly forward rates for 360 months. CFE uses Implied Forward logic to calculate forward monthly rates. For more information on Implied Forward logic, see Forecast Rate Calculations.

   For Monte Carlo Simulation, CFE use provided Term Structure Model and its parameters to calculate monthly forward rates for 360 months.

   Note:

   For more information on Monte Carlo simulation, see Monte Carlo Analytics.
2. CFE outputs Value at Risk (VaR) and Earnings at Risk (EaR) for all the rate paths the user requires.

   Note:

   Stochastic Monte Carlo / Historical simulation is a single factor modeling of interest rates of Reporting Currency. Although the engine does convert Balances into Reporting Currency, there is no correlation of Risk factors of particular Currency’s Interest rates with Reporting Currency. Stochastic processing is not intended for Multi-currency processes. For best results, run Historical/ Monte Carlo calculation for a Single currency where Functional Currency = Reporting Currency.
3. The probabilities are arrived by taking the inverse of the Number of rate paths. That is, if the number of rate paths is 2000, then the probability values will start from 0.0005 which is 1/2000 and reach to 1.0 in steps of 0.0005. If Number of rate path is 10, then probability values will start from 1/10 = 0.1
4. CFE writes VaR results to the FSI_O_STOCH_VAR and FSI_O_STOCH_TOT_VAR tables. Output at product leaf-level goes into the FSI_O_STOCH_VAR table. Aggregated results at reporting currency levels go into the FSI_O_STOCH_TOT_VAR table.
5. At-Risk, Period is the VaR Period used by CFE to calculate VaR.
6. CFE writes EaR results to the EAR_LEAF_DTL_xxxxxx, EAR_LEAF_AVG_xxxxxx, EAR_TOTAL_DTL_xxxxxx and EAR_TOTAL_AVG_xxxxxx tables.
7. CFE writes the Market Value results to the FSI_O_STOCH_MKT_VAL table. This is the average of the Present Values across the rate paths for all instruments aggregated by product.
8. CFE uses the Interest Rate Curve selected as the Valuation Curve in the Stochastic Rate Index Rule as a Discounting Curve.
9. If the user selects “One Month Rate” CFE output valuation curve discount rates to FSI_INTEREST_RATES_AUDIT. Index IRC rates are not output to this table, but Users can calculate it as needed using the relationship defined.
10. CFE populates FSI_O_PROCESS_CASH_FLOWS also for auditing purposes, depending upon the user selection.

    Market Value and Value at Risk (VaR) Calculation.