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Incorrect ALM Market Value Results and Incorrect Discount Rate Used When Using Forecast Remaining Term (Doc ID 2217491.1)

Last updated on MARCH 13, 2019

Applies to:

Oracle Financial Services Asset Liability Management - Version 8.0.2 and later
Information in this document applies to any platform.
Oracle Financial Services Analytical Applications (OFSAA)
Oracle Financial Services Asset Liability Management (ALM)


On ALM 8.0.2, it appears that there are incorrect market value results when using Forecast Remaining Term.


Have created an ALM dynamic deterministic process which has as source only one record - a term deposit expiring in 33 days (as of date = origination date) having one cash flow to pay (Principal + Interest).

The "Discount Methods" definition contains only one assumption for the corresponding <Product, Currency> combination of the source record. The method is "Forecast Remaining Term".

The "Forecast Rate Scenarios" assumption contains only one scenario and have defined "Flat" method for the Interest Rate Curve (IRC) which was used in the "Discount Methods" assumption.

In order to validate the Market Value results have enabled the "Audit" option in the ALM process. Based on this output have used the following Financial Elements:

490 Discount Rate IS
492 Discount Factor
493 Discount Factor Term (Days)
494 Rate Lookup Term (Days)
710 Market Value
715 Present Value of Principal Cash Flows
716 Present Value of Interest Cash Flows

Based on the theoretical concepts which characterize the "Forecast Remaining Term" method, when trying to validate Market Value have noticed that the "Discount Factor" takes into account a wrong discount rate.

According to the "Cash Flow Engine (CFE) User Guide", "Discount Rate IS" can be validated as follows:

Discount Rate IS = Discount Rate * Present value of the cash flows

Using the above formula, it appears that the Discount Rate is outside the interpolation range.

Expect the discount rate IS FE 490 to match the loaded forecast rates.

The issue can be reproduced at will with the following steps:
1. Load Forecast Rates
2. Choose "Forecast Remaining Term" for Discount Rate
3. Run ALM Process


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