5.3.11.1 Volatility Rate Management

As shown in the Transfer Pricing Process, the Rate Lock Option Cost calculation requires following two inputs:

• Discount Curve: This can be a standard Interest Rate Curve.
• Volatility Curve: This is a special form of Interest Rate Curve defined under volatility curve module, where the volatility rates have been selected as per the contractual and commitment terms.

Figure 5-141 Interest Rate Curve

To set up a volatility curve, while defining a new Interest Rate Curve, select the check box – 'Volatility Curve'.

Terms tab: For a Volatility Curve, the Terms tab displays two types of terms – The Contract Term (Loan Term) and the Expiration Term (Rate Lock (option expiry) Term). Users must provide the volatility inputs for all combinations of Contract Term and Expiration Term.

Note:

In the moneyness dimension, associated with option volatility is not required, because Rate Lock Options are assumed to be granted at the money.

The following steps are required to complete the setup of a volatility curve:

• Terms tab - Contract Term: Add rows and input terms for the number of required Loan Terms. These are the maturity term of the loan. Select APPLY to save the data.

  Figure 5-142 Terms Tab – Contract Term

  
  

  

  
  
• Terms Tab – Expiration Term: Add rows and Input Terms for the number of required Expiration Terms. These correspond to the number of Rate Lock Terms offered. Select APPLY to save the data.

  Figure 5-143 Terms Tab – Expiration Term

  
  

  

  
  

Historical Rates tab: After defining and applying the volatility curve dimensions, navigate to the Historical Rates tab and input the volatility rates for each combination of the loan term and rate lock term and for each effective date that you wish to store historical volatility data.

Figure 5-144 Historical Rates Tab

Select Apply to save the data.