Module 5

Scenario Library

RiskSpan Edge Training Program

Learning Objectives

By the end of this module, you will be able to:

  • Understand the purpose of the Scenario Library
  • Identify different scenario types available
  • Create and save scenarios
  • Apply scenarios in Portfolio View
  • Use Group Scenarios for comprehensive analysis
  • Manage scenario permissions

What is the Scenario Library?

Definition

The Scenario Library is a comprehensive suite for creating and managing analysis scenarios in Edge.

Purpose

Enable "what-if" analysis by:

  • Modifying assumptions
  • Testing different market conditions
  • Comparing outcomes across scenarios

Key Benefit

Run the same portfolio under multiple conditions to understand risk and sensitivity.

Types of Scenarios

Model-Specific Scenarios

Type Purpose
Credit & Prepayment Combine default and prepay assumptions
Loan Model Assumptions Customize loan-level inputs
Security Model Assumptions Define security-specific parameters
Custom Securities Create custom instrument definitions

Macro-Economic Scenarios

Type Purpose
Interest Rates Rate curve shifts
HPI Home Price Index projections
Mortgage Rates Current coupon assumptions
Unemployment Rates Economic stress testing

Credit and Prepayment Scenarios

What You Can Configure

Prepayment Settings

  • Prepay model version
  • Prepay multipliers
  • Custom CPR vectors

Credit Settings

  • Default model version
  • Severity assumptions
  • Custom CDR vectors

Use Case

Compare how portfolio value changes under aggressive vs. conservative prepayment assumptions.

MSR Assumptions

Specialized for MSR Analysis

Found in: Scenario Library -> MSR Assumptions tab

Configurable Items

  • Cost to service (current/delinquent)
  • Ancillary income
  • Float interest rates
  • Escrow balances
  • Servicing recapture estimates
  • Loss overrides

File Management

  • Upload Excel version
  • Edit within Edge
  • Save multiple versions
MSR Assumptions Tab
Video: 70:00-80:00

Group Scenarios

Combining Multiple Scenarios

What is a Group Scenario?

A single "hub" that combines multiple individual scenarios:

  • Credit scenario
  • Prepay scenario
  • Interest rate scenario
  • HPI scenario

Benefits

  • Run comprehensive analysis in one click
  • Ensure consistent assumptions across tests
  • Easily reuse complex scenario combinations

Creating a Scenario

Step-by-Step Process

  1. Navigate to Scenario Library module
  2. Select scenario type tab
  3. Click New or Create
  4. Configure parameters
  5. Enter descriptive name
  6. Click Save

Naming Best Practice

Use descriptive names:

  • Base_Case_2024
  • Rate_Up_100bp
  • Aggressive_Prepay
  • Stress_HPI_Down_20pct

Applying Scenarios in Portfolio View

How to Use Your Scenarios

Step-by-Step

  1. Load portfolio in Portfolio View
  2. Go to SCENARIO section
  3. Select scenario from dropdown
  4. (Optional) Configure:
    • OAS Paths: 1-250
    • OAS Basis: Treasury, SOFR, or LIBOR
  5. Click Run Analytics

OAS Configuration

OAS Paths

What It Is

Number of Monte Carlo simulation paths

Range: 1 to 250

Trade-off

  • More paths = more accurate results
  • More paths = longer run time

OAS Basis

Basis Use Case
Treasury Government benchmark
SOFR Secured overnight rate
LIBOR Legacy benchmark (being phased out)

Permissions Tab

Sharing Scenarios

Grant Access to Team Members

  • View permission: Can use but not edit
  • Edit permission: Can modify scenario

Benefits of Sharing

  • Consistent assumptions across team
  • Collaborative scenario development
  • Reduced duplicate effort

How to Share

  1. Open scenario
  2. Go to Permissions tab
  3. Add user email
  4. Select permission level
  5. Save

KRD Scenarios

Key Rate Duration Analysis

What is KRD?

Measures sensitivity to interest rate changes at specific points on the yield curve.

How It Works

  1. Create KRD scenario with rate shifts at specific tenors
  2. Apply to portfolio
  3. View duration impact at each tenor

Common Tenors

6M, 1Y, 2Y, 3Y, 5Y, 7Y, 10Y, 20Y, 30Y

Scenario Library Best Practices

Organization Tips

  1. Use consistent naming conventions
  2. Document scenario assumptions in description field
  3. Archive old scenarios rather than delete
  4. Share team scenarios via permissions
  5. Create Group Scenarios for common combinations

Version Control

  • Save new version rather than overwrite
  • Include date in scenario name
  • Keep "Base Case" scenarios unchanged

Module 5 Summary

Key Takeaways

  1. Scenario Library enables "what-if" analysis
  2. Scenario types include: Credit & Prepayment, MSR Assumptions, Interest Rates, HPI, Mortgage Rates, KRD, Pricing Assumptions
  3. Group Scenarios combine multiple scenario types
  4. OAS Paths range from 1-250 for Monte Carlo simulation
  5. OAS Basis options: Treasury, SOFR, LIBOR
  6. Permissions allow scenario sharing with team

Next Module

Module 6: Data Library - Access market data and curves

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