FDM.3:4 - Solution

FDM.3:4.1 - Recover the arrangement and intended question

Identify the relevant parties, instrument or arrangement, version of the terms and time from which the model starts. Use FDM.1 or FDM.2 for missing positions or boundaries.

State the needed answer: the contractual schedule, an adverse funding scenario, the consequence of an option or another specific question. Reuse existing terms and schedules to the extent that their scope and assumptions match.

FDM.3:4.2 - Extract the terms that determine the events

Recover the event conditions and their consequences from the applicable arrangement. For each relevant event, establish who acts or pays, to whom, what amount or quantity is determined, in which currency and at what time. Include calculation, calendar, exercise, notice or settlement rules when they can change the answer.

Identify the state from which an event is evaluated. Outstanding principal, accrued amounts or a prior exercise can matter. Preserve the rule that updates this state after an event; an amount calculated from an outdated principal can be wrong even when its formula is correctly implemented.

Ask the responsible specialist about a missing or disputed term. A software default can represent an explicit modeling assumption, but it cannot silently establish the actual contract’s meaning.

FDM.3:4.3 - Derive and inspect contractual behavior

Work through the relevant events in their applicable order. Apply the terms and state changes to derive the schedule or conditional branches. Keep terms, supplied input values and derived amounts distinguishable enough to inspect.

A simple fixed-payment loan can be modeled in two rows. An instrument with contingent payments may require branches or an executable model. Where an event’s order or date can change the result, inspect that boundary case explicitly. Choose the representation from the behavior the question needs.

Check that the resulting flows agree with the terms under representative conditions. A calculation can be mechanically correct while using the wrong meaning for “amount”, the wrong party or an inappropriate initial state.

FDM.3:4.4 - Add scenarios and performance without replacing the contract

For a scenario, state the additional assumptions: market values, exercise, default, recovery or another condition relevant to the use. Derive the resulting conditional flows. If a probability or expectation is needed, obtain an adequate basis for it and retain its conditions.

Keep the contractual schedule available alongside expected or scenario flows. An expectation is an account across possible outcomes under a model; it is not another amount that every counterparty must pay. Likewise, an observed payment belongs to the actual-performance account. FDM.4 establishes its effect on remaining positions.

A financial choice or valuation may need discounting, risk treatment or comparison with alternatives. Supply the qualified flows to the relevant financial method; the event model alone does not select those decision rules.

FDM.3:4.5 - Return the usable event model and its limits

Return the contractual or conditional flows, relevant parties, time rules and assumptions at the detail the receiving use needs. Name a missing term or uncertain input where it changes the answer.

Return a range, conditional branches or an unresolved amount when the available terms and inputs do not determine one value. Reopen the model when terms, relevant state, a relied-on scenario premise or the intended use changes.