1. User Guide
  2. Business Rules Administration
  3. Application Specific Rules
  4. Transfer Pricing Standard Processes
  5. Standard Process with Customized Calculations Selection
  6. Calculating Economic Value

5.3.9.7.1 Calculating Economic Value

You can choose to calculate Economic Value as part of a Standard Transfer Pricing Process by selecting the Economic Value calculation element. This calculation option refers to the Economic Value assumptions defined within the Transfer Pricing Rule and is also eligible for Alternate Rate Output mapping. Additionally, there are seeded output columns available corresponding to each of the seeded interest type elements.

All Transfer Rate types (Transfer Rate, Transfer Rate Alt, Remaining Term Transfer Rate, and Remaining Term Transfer Rate Alt) will be written to a single/shared column, Economic Value Transfer Rate (EV_TP_RATE). If it is necessary to store more than one of these EV outputs, Alternate Rate Output Mapping can be used. Each type of Adjustment Rate is mapped to its corresponding EV column. For example:

  • Economic Value Liquidity Premium Rate - EV_LIQ_PREM_RATE
  • Economic Value Basis Risk Rate - EV_BASIS_RISK_RATE
  • Economic Value Pricing Incentive Rate - EV_PRIC_INC_RATE
  • Economic Value Other Adjustment Rate - EV_OTH_ADD_ON_RATE
  • Economic Value Other Adjustment Alternate Output - EV_OTH_ADD_ON_RATE_ALT

Also, the All-in TP Rate is mapped to a corresponding EV column.

Economic Value All in Transfer Rate - EV_ALLIN_TP_RATE

The output format for the Economic Value calculation (inputs defined through the Transfer Pricing rule) is as follows:
  • For Assets: Economic Value = MV - BV
  • For Liabilities: Economic Value = BV– MV

Where:

  • BV = Book Value = CUR_BOOK_BAL
  • MV = Market Value = Net Present Value of Principal and Interest Cash Flows

Note:

For Adjustable Rate records, the calculation assumes maturity at the first reprice date. In this case, the Repricing Balance is additionally used to derive the final principal cash flow amount.

In addition to the calculation logic, users can specify the following two parameters:

  • Interest Only: If this option is selected, the Net Present Value calculation considers only the Interest Cash Flows. In this case, the output format is as follows:

    Economic Value = MV

  • Exclude Accrued Interest: If this option is selected, the first interest cash flow will be computed from the As-of-Date to the Next Payment Date. The resulting market value will reflect the clean price.

    For forward starting instruments, which are instruments that are not yet on the balance sheet, that is, ORIGINATION_DATE > AS_OF_DATE, the logic for computing Economic Value is as follows:

    Economic Value =MV

Note:

For forward starting instruments where ORIGINATION_DATE > AS_OF_DATE, the initial Principal Cash Flow (FE210) will be negative, representing the cash outflow. For such instruments, the ORG_BOOK_BAL and CUR_BOOK_BAL should be the same since the instrument is coming into existence in the future.

As shown in the TP Process, the Rate Lock Option Cost calculation requires two inputs both of which come from the Rate Management > Interest Rates page.

  • Discount Curve: This can be a standard Interest Rate Curve.
  • Volatility Curve: This is a special form of Interest Rate Curve, where the volatility curve option has been selected.