23.3.3 Pricing Margin Details Screen
In an income simulation scenario, you may want to price new business for an account at a margin above or below a market interest rate code. For example, you can model a premium paid on CDs in relation to a market yield curve by adding a pricing margin to the interest rate code assigned to the product in the Product Characteristics rule. If you want a rate that is 25 bps above the market yield curve, you will type “0.25" as the pricing margin for the appropriate modeling period.
The Pricing Margin rule uses the modeling period defined in the “active” Time Bucket rule. You should always verify that your modeling horizon and related assumptions are consistent with the As of Date and active Time Bucket rule before processing.
Rate Tiers
Rate Tiers reflect the Rate Dependency Pattern details from the selected Rate Dependency Pattern. You define Pricing Margin assumptions for each rate tier. The application will automatically determine which set of assumptions to apply for a given scenario based on the relationship between the Rate Tier and the related Forecast Rate assumption value.
Margin Type
This option allows you to enter the Margin as Rate (fixed rate) or Percent (percentage of forecast Rate). By default, it is set to Rate.
- If Margin Type is selected as Rate, provided Margin is used as a fixed spread.
- If Margin Type is selected as Percent, Margin needs to be provided
as Percentage of forecast rate. If the margin is 10% of the forecast rate, 10
needs to be provided. Margin is calculated as:
Margin = Margin % * Raw Rate
For more information, see the Cash Flow Reference Guide.
Once you change from Rate to Percent, all unsaved margin data will be deleted.
A warning message is displayed: All entered values will be lost. Do you want to proceed?
Bucket Number
The bucket number input allows you to select a range of buckets over which the pricing margin assumption will apply. Start Date and End Date values are updated automatically based on the Bucket Number input for each row.
Start Date and End Date
When the Pricing Margins detail page opens, the Start Date (min value) and End Date (max value) columns are automatically populated and are read-only values. The date ranges represent the Income Simulation Date buckets as defined in the “active” Time Bucket rule. See Time Buckets for more information. Any new business that originated within these dates is modeled using the pricing margins defined in the Pricing Margin rule. The new business added for each date bucket will have the same net and gross margin for its life. The margins for a particular instrument will not change as the instrument ages.
Gross Margin
Note:
BSP supports only Net Margins.Net Margin
The Net Rate is affected by setting the Net Margin Flag in the Product Characteristics rule. If Net Margin Flag is set to Floating Net Rate, then Net Rate is equal to the Interest Rate Code plus Net Margin.
Note:
If Margin Type is selected as Percent and Net Margin Flag is set to Fixed Net Rate, provided Margin as Percent is treated as Rate.Apply Defined Buckets to all Rate Tiers.
This option allows you to copy the bucket setup from one page to all other Rate Tiers when using Rate Dependent assumptions.