11.6.9 Stochastic Transfer Pricing Process and Stochastic Rate Indexing Rules

The Stochastic Rate Indexing rule is one of the assumption rules that you need to select within a Stochastic Transfer Pricing Process to calculate option costs.

The purpose of the Stochastic Rate Indexing Rule is to establish relationships between a risk-free Interest Rate Code (IRCs) and other interest rate codes or Indexes. The Stochastic Rate Indexing rule allows you to select the valuation curve that the system uses during stochastic processing. The Rate Index rule provides full support for multi-currency processing by allowing you to select one valuation curve per currency supported in your system.

During Stochastic FTP processing, the system generates future interest rates for the valuation curve you selected, which are then used to derive the future interest rates for any Index associated with that valuation curve based on the relationship you define. The rates thus forecasted for the IRCs or Indexes depend on the risk-free curve used for the valuation of instruments associated with the derived IRCs or Indexes. As the risk-free rates change, the non-risk-free interest rates change accordingly.