5.3.3.4.1 Forecast All Business - Forecast Methods

This module discusses modeling of new business activity through the Forecast All Business rule. Included are assumption setup and processing. Within a Forecast All Business rule, you specify the amount of new activity generated per modeling bucket on each MDBSS node within each active currency. To create a new business assumption, you select from eight available forecasting methods. You can further tailor the new business assumptions to meet your expectations of future originations, including the effect of interest rates on new business amounts.

Forecasting Methods

The new business methods within the Forecast All Business rule determine how new business assumptions are applied per MDBSS node within each active currency. They consist of:

• No New Business
• New Add
• Target Average
• Target End
• Target Growth
• Rollover
• Rollover with New Add
• Rollover with Growth %

All forecast methods use the Distributed timing option.

Distributed Option: Solves for the origination date of the new business account to reach an expected average balance, assuming even distribution of new business throughout the modeling bucket. For each modeling bucket, this calculation results in an average balance amount that is midway between the beginning balance and the ending balance.

For the Target Average method, the system automatically determines the timing of new originations to ensure that the user-input target is achieved. For Rollover business, the system assumes that the rollover occurs at the time of runoff of existing accounts.

NOTE:

For distributed originations of Target Growth and Target End balances, Transaction Strategies and future origination in the current position may impact the distributed originations calculation. Because the origination date on Transaction Strategy and current position accounts cannot be modified, the timing algorithm may not be able to find an origination date for the remaining new business which achieves the expected average balance.

The application of each new business method, including how different timing options are applied, is described below:

Forecasting at a Mid-Branch Node

Forecast Methods can be assigned at any node on the MDBSS. When assigning a Forecast Method to a non-terminal MDBSS node it may require the Application to consider the balance effects of all the child nodes. For example, when using Target Growth Percent at a non-terminal node, that target node will consider the balances of its child nodes when calculating the forecast amount. The target node's new business originations will occur on the target node.

Note:

The Forecast Methods that must consider their child node balances are: Target Average, Target End, Target Growth Percent, Target Growth Percent – Allocated.

Forecast Methods that must consider the balances of any child nodes:

• Target Growth Percent

Because the MDBSS can retain balances on any node at any level, then forecasting at a parent node must account for the consolidated balances of its child nodes. These balances in aggregation will be taken into consideration when computing the amount of new originations needed at the target node. All child balances includes both existing and new business originations.

Child nodes may also use any forecast method supported. If one or more child nodes of the target nodes contains a forecast method then those new originations will be computed first and, working up the branch, will be included when the parent node is reached.

For all target types there is only one timing option to indicate when new business for a new account should be originated.

Distributed: Solves for the origination date of the new business account to reach an expected average balance, assuming even distribution of new business throughout the modeling bucket. For each modeling bucket, this calculation results in an average balance amount that is midway between the beginning balance and the ending balance.

Forecasting from an MDBSS Currency Node

In the MDBSS one or more nodes may be of the currency dimension. Any currency dimension member and all of its child nodes inherit this identity for all forecasting. For example, if an MDBSS node is currency member "GBP" then all forecasted balances placed on this node (or its child nodes, if any) will also be GBP. If the currency of the Forecast All Business page filter is not the same as the MDBSS node currency then that node or its child nodes cannot be modified.

No New Business

No New Business (forecasting zero changes in balances) is the default method for the Forecast All Business rule. This method allows runoff without replacement of the paid-down balances. When this Forecast Method is selected users may still enter pricing parameters for the node (in the event of foreign node rollover allocation, for example).

New Add Balance

The New Add Balance method defines the absolute amount of new business that is added within a bucket. This forecast method can be placed on any node in the MDBSS. The new origination amount and the timing of origination are determined during processing, as described below:

New Origination Amount

The new origination amount is equal to the user-input new add balance.

New Business Timing

As will all forecast methods only the distributed originations is supported.

Distributed: The new origination amount is added at the mid-point of the modeling bucket. If the modeling bucket contains an uneven number of days, the origination is apportioned evenly over the two days in the middle of the bucket.

Target Average

Use the Target Average Balance method to define the expected average balance per modeling bucket. The new origination amount and the timing of originations within each modeling bucket are determined during processing, as described below:

New Origination Amount

The new origination amount per bucket is calculated as:

MDBSS Node with no child nodes:

2*(Target Average Balance - Bucket Beginning Balance) + Total Runoff - Transaction Strategies Originations - Current Position Originations

MDBSS Node with one or more child nodes:

2*(Target Average Balance - sum(Bucket Beginning Balance)) + sum(Total Runoff) - sum(Transaction Strategies Originations) - sum(Current Position Originations) - sum(Foreign node allocated rollover)

There are seven categories of rollover. You can choose from: Total, Prepay, Maturity, Payment, Core, Volatile, Devolvement, Recovery, and NPA

New Business Timing

As will all forecast methods only the distributed originations is supported.

Distributed: The new origination amount is added at the mid-point of the modeling bucket. If the modeling bucket contains an uneven number of days, the origination is apportioned evenly over the two days in the middle of the bucket.

Target End

Use the Target End Balance method to define the total expected balance by the end of each modeling bucket. The new origination amount and the timing of originations within each modeling bucket are determined during processing, as described below:

New Origination Amount

MDBSS Node with no child nodes:

Target Ending Balance - Beginning Balance + Total Runoff - Transaction Strategy Originations - Current Position Originations

MDBSS Node with one or more child nodes:

Target Ending Balance - Sum(Beginning Balance) + Sum(Total Runoff) - Sum(Transaction Strategy Originations) - Sum(Current Position Originations) - Sum(Child New Add)

New Business Timing

As will all forecast methods only the distributed originations is supported

Distributed: The new origination amount is added on the calculated date(s) which allow the average balance to equal the beginning balance plus the ending balance divided by two. This calculation accounts for timing of runoff and other originations occurring during the modeling bucket.

Target Growth Percent

Use the Target Growth Percent method to define the expected percentage change in the balance over each modeling bucket, expressed as a percent of the bucket's initial balance. Target Growth can be used to model flat balance sheet by assuming a growth rate of 0%.

This method can be placed on any node of the MDBSS, even if that node has no existing balances for itself. If the method is placed at a node that has one or more child nodes then the balances of those child nodes are taken into account when calculating the amount of new originations. The new business generated will appear on that node and not on its child nodes. If the target node and all of its child nodes have no new or existing balances then the target node will return no new business.

The new origination amount and the timing of origination are determined during processing, as described below:

New Origination Amount

The new origination amount per bucket depends upon whether the MDBSS node has one or more child nodes.

MDBSS Node with no child nodes:

(Beginning Balance * Target Growth Percent + Total Runoff - Transaction Strategy

MDBSS Node with one or more child nodes:

(Sum(Beginning Balance * Target Growth Percent) + Sum(Total Runoff) - Sum(Transaction Strategy) - Sum(Current position originations + child New Add balances)

New Business Timing

As will all forecast methods only the distributed originations is supported

Distributed: The new origination amount is added on the calculated date(s) which allow the average balance to equal the beginning balance plus the ending balance divided by two. This calculation accounts for timing of runoff and other originations occurring during the modeling bucket.

Rollover

Use the Rollover method to base the amount of new business on the rollover (reinvestment of principal on a given or like MDBSS node) of existing business. You can roll any combination of prepayments, maturing balances, and principal runoff from a product into itself or into another MDBSS node. For multiple currency processing, rollover processing occurs within each individual currency. Rollover cannot occur between two currencies. The new origination amount into a particular target MDBSS node and the timing of that origination are described below.

New Origination Amount

For a single target MDBSS node within a single currency, the new origination amount depends on the rollover sources, which are MDBSS nodes of the same currency whose runoff drives the amount of new business generated into the target MDBSS node. For each rollover source, you must also define the components of principal runoff you would like to roll over. Your choices are:

Total: Total runoff includes runoff from all three categories of run-off: scheduled principal payments, prepayments, and maturing balances.

Prepay: Prepay includes runoff from prepayments, early repayment of principal balances.

Maturity: Maturity incorporates payment of principal on the maturity date, above that incorporated in the scheduled principal payment. Balloon payments and final principal repayment of non-amortizing instruments are included in this category.

Payment: Payment runoff includes scheduled principal payment on an amortizing instrument.

For each combination of source MDBSS node and runoff type, you can input a different rollover percent. The new origination amount within a modeling bucket equals the runoff amounts multiplied by the percentage rollover for all source leaves.

New Business Timing

As will all forecast methods only the distributed originations is supported

Distributed: The new origination amount is added on the calculated date(s) which allow the average balance to equal the beginning balance plus the ending balance divided by two. This calculation accounts for timing of runoff and other originations occurring during the modeling bucket.

Rollover with New Add

Use the Rollover with New Add method to apply both rollover assumptions and new add assumptions to a single MDBSS node within a single currency. It allows new business to be driven by reinvestment of existing accounts plus an expectation of new business amounts. The New Add method and the rollover method are applied independently, with the New Add applied first.

Rollover with Growth %

Use the Rollover with Growth Percent method to apply both rollover assumptions and an overall Growth Percent assumption to a single MDBSS node within a single currency. It allows new business to be driven by reinvestment of existing accounts plus an expectation around growth percentage. Growth Percent defined in Target Growth, determines overall growth of product, including rollovers.

Rollover assumption is applied first and is calculated independently on Runoff type selected in rule. To determine Rollover Runoff, see the Rollover. New business via Target Growth is calculated thereafter, and is calculated as

(Beginning Balance * Target Growth Percent + Total runoff - Transaction Strategy Originations - Current Position Originations - Rollover New Business).

For more information on Target Growth, see the Target Growth Percent.

Account Types and New Business

Depending upon the account type attribute associated with an MDBSS node (or its direct descendants) may affect the availability of forecasting new business on that node. MDBSS nodes that are configured to be off balance sheet will not be eligible to have new business assigned to them. For example, on balance sheet MDBSS nodes cannot allocate rollover to off balance sheet MDBSS nodes, and vice versa.

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: If you select Interpolate, Oracle ALM uses a straight line interpolation method to find a value between the two given points.

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.