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NII simulation

NII simulation

We walk through the steps of generating an NII simulation.

Income simulation is an integral part of effective balance sheet management. In contrast to valuation of the balance sheet, i.e., calculation of economic value, income simulation requires more assumptions on the evolution of the balance sheet.

To get a reasonable income scenarios, one usually assumes replacement of contracts to keep the size of the balance sheet intact. Scenarios that assume growth of the balance sheet are also considered.

Economic value of the balance sheet uses projections of cash flows according to forward curves. To be consistent with this view of the balance sheet, replacement contracts should also be constructed using forward curves. In essence, one should not create economic value simply by replacing contracts on the balance sheet. Economic value should only be changed by explicit assumptions of growth or when evaluating scenarios.

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