Scenario Analysis, Simulation Analysis



Example Interest Rate Scenario Exhibit 1 | ||||||||
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time (months) | 1-month Libor | 3-month Libor | 6-month Libor | 12-month Libor | 3-year Swap | 5-year Swap | Prime | COFI |
0 | 3.11 | 3.33 | 3.54 | 3.79 | 4.07 | 4.24 | 6.25 | 2.62 |
6 | 3.06 | 3.27 | 3.47 | 3.71 | 3.96 | 4.02 | 6.25 | 2.68 |
12 | 3.01 | 3.21 | 3.40 | 3.63 | 3.88 | 3.96 | 6.25 | 2.65 |
18 | 2.93 | 3.15 | 3.35 | 3.59 | 3.87 | 3.96 | 6.25 | 2.61 |
24 | 2.95 | 3.06 | 3.25 | 3.48 | 3.74 | 3.82 | 6.25 | 2.53 |
. . . | . . . | . . . | . . . | . . . | . . . | . . . | . . . | . . . |
114 | 4.85 | 4.87 | 4.59 | 5.02 | 5.22 | 5.38 | 8.00 | 3.98 |
120 | 4.88 | 4.91 | 4.64 | 5.08 | 5.23 | 5.51 | 8.00 | 4.04 |
One hypothetical scenario that might be constructed for a bank as part of its scenario analysis. The horizon is ten years with a six-month time step. |





Simple Scenario: Interest Rates Decline 100 Basis Points Exhibit 2 | ||||||||
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time (months) | 1-month Libor | 3-month Libor | 6-month Libor | 12-month Libor | 3-year Swap | 5-year Swap | Prime | COFI |
0 | 3.11 | 3.33 | 3.54 | 3.79 | 4.07 | 4.24 | 6.25 | 2.62 |
6 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 2.62 |
12 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 1.62 |
18 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 1.62 |
24 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 1.62 |
. . . | . . . | . . . | . . . | . . . | . . . | . . . | . . . | . . . |
114 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 1.62 |
120 | 2.11 | 2.33 | 2.54 | 2.79 | 3.07 | 3.24 | 5.25 | 1.62 |
Scenarios can be quite simple, say assuming that interest rates immediately decline by 100 basis points and stay at that level for the duration of the scenario. Note that, in this scenario, a six-month lag is assumed for the response of COFI to the sudden decline in rates. |
Example Output: Net Interest Income by Scenario Exhibit 3 | |||||
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| Interest Rate Scenario | ||||
time (months) | decline 200 bp | decline 100 bp | flat | rise 100 bp | rise 200 bp |
0 | 27 | 27 | 27 | 27 | 27 |
6 | 38 | 32 | 27 | 23 | 19 |
12 | 34 | 30 | 28 | 25 | 22 |
18 | 31 | 29 | 28 | 26 | 24 |
24 | 30 | 28 | 28 | 27 | 26 |
. . . | . . . | . . . | . . . | . . . | . . . |
114 | 36 | 37 | 38 | 40 | 43 |
120 | 36 | 37 | 38 | 40 | 43 |
Sample output of scenario analysis for a bank. Five scenarios are considered. Each assumes a specific basis point change in interest rates, which then remains unchanged for the duration of the scenario. Projected net interest income (in millions of USD) is presented over time under each. |