Change of Market Data: Simulating Provisions

Use Case

You want to simulate higher or lower provisions if the reference rate rises above or falls below a certain threshold.

Calculation

The above situation has an impact on the balance sheet item ‘Risk provisioning’, which currently shows the following value:

A corresponding simulation can be performed by using a Scenario Analysis as well as the Conditions function and theForecast Parameter function in the Control File as follows:

[10004]_BEST = if Forecast reference rate <= 0.04 then [10004] - 5000 else [10004]
[10004]_WORST = if Forecast reference rate >= 0.045 then [10004] + 5000 else [10004]

Calculation Data

To perform the calculation, the following data is provided:

• in sheet Input Files | FORECASTS

Result

As there is no entry in the control file for the balance sheet item ‘Risk provisioning’, its value remains unchanged at 20,000.00 across all periods.

A scenario BEST was created in the control file. In this scenario, the value of the balance sheet item ‘Risk provisioning’ is reduced by 5,000.00 if the reference rate is not more than 4%. As this only applies to 31/12/2025, the simulated values of the balance sheet item ‘Risk provisioning’ in the BEST scenario are as follows:

• 31/12/2024: 20,000.00

• 31/12/2025: 20,000.00 - 5,000.00 = 15,000.00

• 31/12/2026: 20,000.00

A scenario WORST was created in the control file. In this scenario, the value of the balance sheet item ‘Risk provisioning’ is increased by 5,000.00 if the reference rate is at least 4.5%. As this only applies to 31/12/2026, the simulated values of the balance sheet item ‘Risk provisioning’ in the WORST scenario are as follows:

• 31/12/2024: 20,000.00

• 31/12/2025: 20,000.00

• 31/12/2026: 20,000.00 + 5,000.00 = 25,000.00

Variant

Irrespective of the development of the reference rate, you assume that you will have to increase your provisions by 10% in each of the next three years. The above simulation should continue to be performed in the same form.

This can be applied in the Control File as follows:

[10004] + 10%
[10004]_BEST = if Forecast reference rate <= 0.04 then [10004] - 5000 else [10004]
[10004]_WORST = if Forecast reference rate >= 0.045 then [10004] + 5000 else [10004]

The simulated values of the balance sheet item ‘Risk provisioning’ then amount to: