30.1.2 Implied Forward Rate Calculation

An Implied Forward is that rate of interest that is predicted to be the spot rate in the future. For more information, see Rate Locks and the Loan Commitment Pipeline.

Procedure:

• Identify the record is as a Rate lock record, and select Forward Curve from Calculation Elements (Transfer Rate checkbox as Forward Transfer Rates) under the TP Processing window. If you want to price Transfer rates off the Forward Curve, the Forward Curve can be generated for the same term points as the Spot Curve under the Transfer Price Rule UI. For example, the selected TP Curve has the following term points – 1M, 2M, 3M, 6M, 12M, 2Y, 3Y, then the Forward TP rates will be calculated for the same term points.
• The approach is the same for both Cash Flow Methods and Non-Cash Flow Methods.
• After the Forward TP Curve is ready with all the term points, the TP solution goes through the existing flow for calculating Transfer Rates according to the method selected, except that the Forward TP curve is referenced instead of the Spot TP Curve. If the required tenor or effective date is not directly available, then Interpolation will be used. Three types of Interpolation are available – Linear, Cubic Spline, and Quartic Interpolation.

All TP Methods can reference the appropriate implied forward rates.

Note:

Forward rates are not required for the Spread from Note Rate TP method. Prior day results will be propagated forward, and after post-processing, all open commitments will have a Transfer Rate and Rate Lock Option Cost assigned through either propagation or new calculation. The engine has to use only the Standard Term for TP calculation and not the Remaining Term.