5.3.4.1.10 Tractor Method
The Tractor Method extends the concept of Strip Funding to instruments that do not have contractual Cash Flows. These products are known as perpetual or non-maturity products and hence do not generate contractual Cash Flows. The process of determining transfer rates requires adopting the strip funding approach by splitting these products into Core and Volatile portions based on statistically established Behavioral Profiles. With this method, the volatile portion is considered to have an overnight maturity and the core portion is assigned a longer maturity (through Replicating Portfolio) which is comprised of a series of balance strips corresponding to the maximum tenor of the portfolio (on the origination of the portfolio, original strips will have shorter maturities). Each strip is assigned a transfer rate corresponding to its Origination Date and corresponding Term. The historical, active strips are retained for the portfolio and the Portfolio Transfer Rate is determined based on the Weighted Average Transfer Rate of the strips comprising the portfolio. The Weighted Average Rate from the strip portfolio is written back to all instrument records that are mapped to this portfolio through the Transfer Pricing Rule.
Figure 5-52 Tractor Method
The characteristics of the replicating portfolio used by the Tractor Method are defined through Replicating Portfolio Module. The following example illustrates the behavior of a small 3-day portfolio rolling across 4 days.
Table 5:
Table 5-19 Replicating Portfolio
31-Jan-11 | ||||||
---|---|---|---|---|---|---|
Strip | Start | Maturity | Balance | TP Rate | Date Rolled | Comment |
0A | 31-Jan-11 | 1-Feb-11 | 100 | 5.00% | 1-Feb-11 | |
0B | 31-Jan-11 | 2-Feb-11 | 100 | 5.10% | 3-Feb-11 | |
0C | 31-Jan-11 | 3-Feb-11 | 100 | 5.20% | 3-Feb-11 | Matures and rolls to 3A |
1A | 1-Feb-11 | 4-Feb-11 | 100 | 5.30% | ||
2A | 2-Feb-11 | 7-Feb-11 | 100 | 5.40% | ||
3A | 3-Feb-11 | 8-Feb-11 | 100 | 5.50% | Rollover strip, TP’s by the engine | |
Day 1 | ||||||
1-Feb-11 | Daily Rollover | |||||
Strip | Start | Maturity | Balance | Rate | Date Rolled | Comment |
0A | 31-Jan-11 | 1-Feb-11 | 100 | 5.00% | 1-Feb-11 | Matures and rolls to 1A |
0B | 31-Jan-11 | 2-Feb-11 | 100 | 5.10% | ||
0C | 31-Jan-11 | 3-Feb-11 | 100 | 5.20% | ||
1A | 1-Feb-11 | 4-Feb-11 | 100 | 5.30% | Rollover strip, TP’s by the engine | |
Day 1 Maturity Profile | ||||||
Total | Day 1 | Day 2 | Day 3 | |||
2-Feb-11 | 3-Feb-11 | 4-Feb-11 | Tractor TP Rate | |||
300 | 100 | 100 | 100 | 5.20% | ||
Day 2 | ||||||
2-Feb-11 | Daily Rollover | |||||
0A | 31-Jan-11 | 1-Feb-11 | 100 | 5.00% | 1-Feb-11 | |
0B | 31-Jan-11 | 2-Feb-11 | 100 | 5.10% | 2-Feb-11 | Matures and rolls to 2A |
0C | 31-Jan-11 | 3-Feb-11 | 100 | 5.20% | ||
1A | 1-Feb-11 | 4-Feb-11 | 100 | 5.30% | ||
2A | 2-Feb-11 | 7-Feb-11 | 100 | 5.40% | Rollover strip, Transfer Priced by the engine | |
Day 2 Maturity Profile | ||||||
Total | Day 1 | Day 2 | Day 3 | |||
3-Feb-11 | 4-Feb-11 | 7-Feb-11 | Tractor TP Rate | |||
300 | 100 | 100 | 100 | 5.30% | ||
Day 3 | ||||||
3-Feb-11 | Daily rollover, and new business (reduction of 530) | |||||
0A | 31-Jan-11 | 1-Feb-11 | 100 | 5.00% | 1-Feb-11 | |
0B | 31-Jan-11 | 2-Feb-11 | 100 | 5.10% | 3-Feb-11 | |
0C | 31-Jan-11 | 3-Feb-11 | 100 | 5.20% | 3-Feb-11 | Matures and rolls to 3A |
1A | 1-Feb-11 | 4-Feb-11 | 100 | 5.30% | ||
2A | 2-Feb-11 | 7-Feb-11 | 100 | 5.40% | ||
3A | 3-Feb-11 | 8-Feb-11 | 100 | 5.50% | Rollover strip, Transfer Priced by the engine | |
3B | 3-Feb-11 | 4-Feb-11 | 10 | 5.50% | New Business strip, Transfer Priced by the engine | |
3C | 3-Feb-11 | 7-Feb-11 | 10 | 5.50% | New Business strip, Transfer Priced by the engine | |
3D | 3-Feb-11 | 8-Feb-11 | 10 | 5.50% | New Business strip, Transfer Priced by the engine | |
Day 3 Maturity Profile | ||||||
Total | Day 1 | Day 2 | Day 3 | |||
4-Feb-11 | 7-Feb-11 | 8-Feb-11 | Tractor TP Rate | |||
270 | 90 | 90 | 90 | 5.39% | ||
Day 4 | ||||||
4-Feb-11 | Daily rollover | |||||
0A | 31-Jan-11 | 1-Feb-11 | 100 | 5.00% | 1-Feb-11 | |
0B | 31-Jan-11 | 2-Feb-11 | 100 | 5.10% | 2-Feb-11 | |
0C | 31-Jan-11 | 3-Feb-11 | 100 | 5.20% | 3.-Feb-11 | |
1A | 1-Feb-11 | 4-Feb-11 | 100 | 5.30% | 4-Feb-11 | Matures and rolls to 4A |
2A | 2-Feb-11 | 7-Feb-11 | 100 | 5.40% | ||
3A | 3-Feb-11 | 8-Feb-11 | 100 | 5.50% | ||
3B | 3-Feb-11 | 4-Feb-11 | -10 | 5.50% | 4-Feb-11 | Matures and rolls to 4A |
3C | 3-Feb-11 | 7-Feb-11 | -10 | 5.50% | ||
3D | 3-Feb-11 | 8-Feb-11 | -10 | 5.50% | ||
4A | 4-Feb-11 | 9-Feb-11 | 90 | 5.60% | Rollover strip, Transfer Priced by the engine | |
Day 4 Maturity Profile | ||||||
Total | Day 1 | Day 2 | Day 3 | |||
7-Feb-11 | 8-Feb-11 | 9-Feb-11 | Tractor TP Rate | |||
270 | 90 | 90 | 90 | 5.50% |
This example assumes a business day calendar is enabled with the following business days defined:
- Business Day
- Calendar
- 31-Jan-11
- 1-Feb-11
- 2-Feb-11
- 3-Feb-11
- 4-Feb-11
- 7-Feb-11
- 8-Feb-11
- 9-Feb-11
- 10-Feb-11
- 11-Feb-11