8.5.1 Assumption Calculation

In the Run Definition window, assumptions can either be “Applied To” Changing Balance/Cash Flows or Original Balance/Cash Flows. This calculation is applied across business assumptions in a single Run. It is applicable across business assumptions based on the option selected as part of the Assumption Applied To field in the Run Definition window. This means that all assumptions are now executed sequentially and the effects of the previous assumption are taken into account if the Changing Balance/Cash Flows option is selected in the Run Definition window.

1. Original Balance/ Cash Flows - When the user selects Original Balance/Cash Flows as a Run level parameter, it calculates the assumption based on the original balance. It has a standalone effect i.e. assumption value is always applied on the original balance. This basis is applicable to each subsequent business assumption where the effects of the previous assumption are ignored for the purpose of estimating the impact of an assumption i.e. the assumption cash flows arising out of the given assumption.

   Example 1: In case of original balance, when a Run is executed with two assumptions, the assumption value is defined on the original balance and not on the revised balance of the selected bucket (Refer table 2 – Customer 2)

   Run 1: Original Balance (Run-off and Rollover)

   Assumption 1: Run-off

   Table 7-63 Business Assumption Definition

   Business Assumption Definition
   Legal Entity	Customer	From Bucket	To Bucket	Assumption Unit	Run-off	Assignment Method	Assumption Category	Based On
   Legal Entity 1	Customer 2	6-6Days	3-3Days	Percentage	10%	Equal	Cash Flow Movement : Run - off	Cash Flows

   Table 7-64 Assumption Calculation - Original Balance/ Cash Flows (Run-off)

   Computation
   To Bucket	Contractual Cash Flow		Run-off	Revised Cash flow
   	(From Bucket)	(To Bucket)		(From Bucket)	(To Bucket)
   Overnight	20000	10000	500	18000 (20000-2000)	10500
   			(20000*10%)/4		(10000+500)
   1-1 Day		11000	500		11500
   			(20000*10%)/4		(11000+500)
   2-2 Days		22000	500		22500
   			(20000*10%)/4		(22000+500)
   3-3 Days		12000	500		12500
   			(20000*10%)/4		(12000+500)

   Assumption 2: Rollover

   Table 7-65 Assumption Calculation - Original Balance/ Cash Flows (Rollover)

   Business Assumption Definition
   Legal Entity	Customer	From Bucket	To Bucket	Assumption Unit	Rollover	Assignment Method	Assumption Category	Based On
   Legal Entity 1	Customer 1	6-6Days	7-7 Days	Percentage	10%	Selected	Cash Flow Movement : Rollover	Cash Flows
   	Customer 2		8-8 Days		20%

2. Changing Balance/Cash Flows: - This takes into account the cascading effect of an assumption on cash flows and EOP balance at a Run level parameter. Cascading effect refers to the scenario where the impact of the assumption value is calculated based on changing balance across assumptions and “not within an assumption”. However, cascading effect can be seen across assumptions at Run level taking into consideration the impact of the previous assumption on the EOP balance or cash flows. In this case, the cash flows or EOP balances are recalculated after each assumption and the subsequent assumption values are calculated based on the updated cash flows or balances.

   Example 1: In case of changing balance, when a Run is executed with two assumptions, the assumption value is defined on the revised balance of the selected buckets.

   Run 2: Changing Balance (Run-off and Cash Flow Delay)

   Assumption 1: Run-off

   Table 7-66 Business Assumption Definition

   		Business Assumption Definition
   Legal Entity	Customer		From Bucket	To Bucket	Assumption Unit	Applied to	Run-off	Assignment Method	Assumption Category	Based On
   Legal Entity 2	Customer 3		6-6 Days	3-3 Days	Percentage	Changing Balance	10%	Equal	Cash Flow Movement : Run - off	Cash Flows

   Table 7-67 Assumption Calculation - Changing Balance/Cash Flows (Run-off)

   Computation
   To Bucket	Contractual Cash Flow		Rollover	Revised Cash flow
   	(From Bucket)	(To Bucket)		(From Bucket)	(To Bucket)
   Overnight	20000	10000	500 (20000*10%)/4	18000 (20000- 2000)	10500 (10000+500)
   1-1Days		11000	500 (20000*10%)/4		11500 (11000+500)
   2-2Days		22000	500 (20000*10%)/4		22500 (22000+500)
   3-3Days		12000	500 (20000*10%)/4		12500 (12000+500)

   Assumption 2: Cash Flow Delay

   Table 7-68 Cash Flow Delay

   Business Assumption Definition
   Customer	From Bucket	To Bucket	Assumption Unit	Applied to	Assignment Method	Assumption Category	Based On
   Customer 3	6-6 Days	12-12 Days	Percentage	Changing Balance	Selected	Cash Flow Movement : Cash Flow Delay	Cash Flows

   Table 7-69 Assumption Calculation- Cash Flow Delay

   Computation
   Contractual Cash Flow (From Bucket)	Contractual Cash Flow (To Bucket)	Delay + Penalty	Revised Cash flow - From Bucket	Revised Cash flow -To Bucket
   18000	23000	10% + 5%	16200 (18000-10%*18000)	24890 {23000+ (18000*10%) + (1800*5%)}

   In the above computation, when Run is executed with a new assumption category, assumption value is applied on the changing balance.