11.6.5 Transfer Pricing Process Rule and Calculation Modes

You can choose to transfer price of your product portfolio either in the Standard or in Remaining Term calculation mode.

The Standard calculation mode allows you to calculate transfer rates for instrument records based on the Origination date or Last Repricing Date of the instruments. It can also be used to calculate Option Costs based on the Origination Date.

The Remaining Term calculation mode allows you to calculate transfer rates and option costs for instrument records based on the remaining term of the instrument from the calendar period end date of the data, rather than the Origination Date or Last Repricing Date of the instruments. The Remaining Term calculation mode treats your portfolio as if you acquired it on the As-of-Date of your data and thereby allows you to measure current rate risk spread. After you know the current rate risk spread, you can segregate your total rate risk spread into that accruing from taking current rate risk and that accruing from taking embedded rate risk:

Embedded Rate Risk Spread = Total Rate Risk Spread - Current Rate Risk Spread

Note:

It is important to segregate total rate risk into embedded and current rate risks for the following reasons:

• The current rate risk can be actively managed through an effective Asset/Liability Management process.
• Embedded rate risk is a result of rate bets taken in the past. However, it is important to measure and monitor this risk. When you are aware of your embedded rate risk you will neither be lulled into a false sense of security nor take drastic actions in response to profit or losses caused by the embedded rate risk.