Discounted Cash Flow

If the parameters used in the Discounted Cash Flow computation are all observable values, then the Level may be assigned as 2. For an instrument to be assigned as Level 2, then the following conditions must be met:

• Prepayment Model - If the instrument or product is not associated with a prepayment model.
• Interest Rate Curve - If the interest rate curve used for discounting is a market curve and not a forecast.

In the application, all instruments valued via the DCF method are verified for the above rules. If either a prepayment model or a forecast curve is used, then the FV of the instrument is assigned as Level 3.

Note:

ALM Processes created by Level 3 HM Fair Valuation Run are now editable. While editing these ALM processes, you must ensure that the underlying parameters in the ALM Process do not impact the process execution.

For Level 3 Instruments, processed by Discounted Cash Flow approach, where the Maturity date is the same as As of Date, the Fair Value will be 0, because there are no cash flows post maturity date.

All exchange rates in FX-related instrument tables are expected to be populated as several units of Buy or Receive Currency per one unit of Sell or Pay Currency.

If the Maturity Date of an Instrument is lesser than the as-of-date, such Instruments are included in the Valuations processing, after setting the Fair Value as zero on the as-of-date. This Fair Value, which is equal to zero, is considered for all downstream processing.

If the Maturity Date of an Instrument is not provided, such instruments are still processed normally like other Instruments whose Maturity Date is greater than or equal to the as-of-date.