7.4.1 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 considered 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, or assumption, that value is always applied to the original balance. This basis applies to each subsequent business assumption where the effects of the previous assumption are ignored to estimate the impact of an assumption, such as the assumption cash flows arising out of the given assumption.

    Example 1: In case of the 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 7-62 Assumption Calculation - Original Balance/ Cash Flows (Run-off)

    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 Cash Flows
    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 7-63 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%      
    7-7 Days 20000 7000 2000 (20000*10%)

    14000

    (20000-2000-4000)

    9000

    (7000+2000)

    		      
    8-8 Days   10500 4000 (20000*20%)  

    14500

    (10500+4000)

    		      
  2. Changing Balance/Cash Flows:

    This considers 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, the 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 the 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 7-64 Assumption Calculation - Changing Balance/Cash Flows (Run-off)

    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 7-65 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 7-66 Assumption Calculation- 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 7-67 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.