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Profitability & Funds Transfer Pricing

Since 1997, QRM has been collaborating with clients to implement profitability methodologies that allow them to not only price and forecast their funding accurately, but also to forecast Shareholder Value Added measurement across business lines. Years of experience reengineering our clients' practices by synthesizing our reporting expertise with our pioneering research in option-adjusted transfer pricing methodology have made QRM a clear leader in developing profitability best practices.

Accurately Calculate the Transfer Spread Regardless of Product Complexity
Our Profitability & Funds Transfer Pricing (FTP) engagement assists clients in computing a funds transfer spread (or rate) and capital charge for every financial transaction, and for non-financial transactions as well. QRM consultants have experience with all standard FTP methodologies, including Principal-weighted, Zero-coupon Strip and Macaulay Duration. In addition, our consultants know when and how to apply proprietary Option-adjusted Strip and Lattice Strip methodologies, bringing increased accuracy to the entire process. These approaches solve the inherent problems with traditional single-rate, scenario-based matched funding styles of transfer pricing.

The processes we help our clients build allow them to see all-in profitability analysis for any given pricing decision, or for a required interest rate (or other contractual parameter) for a given all-in profitability objective. This can be done at any level, including business unit, business line, product, or customer levels.

Assign Interest Rate Risk to the Experts for Accurate Hedging Decisions
Our clients transfer interest rate risk to the funding centers while keeping loan loss risk to the business lines. As a result the funding center has an accurate view of interest rate exposure and the business intelligence necessary to develop sound hedging strategies. Business managers are consequently able to focus on what they do best--generate revenue.

Allow the Business Manager to Focus on Maximizing the Unit's Return
QRM's clients exchange transaction information and transfer pricing results across the organizational hierarchy vertically and horizontally, thereby enabling profitability analyses to be performed by customer/profit center/product line/legal entity, etc. In addition, our clients' processes produce pro forma (forward-looking) FTP and SVA calculations, allowing the organization to measure and forecast the profitability of its various business lines. All processes generate detailed reports displaying current period and forecasted SVA, as well as variance and trend analysis of actuals vs. forecasts--reports that are indispensable tools for business managers and decision makers.

Pro Forma FTP and SVA Methodologies Turn Measuring Risk into Creating Revenue
QRM consultants not only work with clients to understand their historical profitability trends, but they also encourage clients to build pro forma FTP and SVA processes that enable them to maximize profitability in any rate environment. By embracing an SVA process that incorporates accurate pro forma FTP and capital assignment, front-line managers can quickly and accurately simulate changes in pricing, demand, and other factors, to better understand how to respond to changing market conditions before they occur. This proactive approach provides everyone in the organization with the first-mover advantage necessary to succeed in today's highly competitive marketplace.

Integrate Economic Capital Calculations to Create Complete Shareholder Value Added Analysis
Clients who subscribe to our Credit Risk & Capital Management engagement build processes capable of determining expected and unexpected loss for both large corporate loans (single obligor) and consumer loans (pooled), based on institution-specific assumptions and models. These clients are able to allocate this capital down to the transaction level and avoid the inaccuracies that result from employing generic capital assumptions into their profitability analysis. Integrating economic capital charges into pro forma FTP calculations allows clients to forecast SVA and create business strategies and decisions that lead to optimized profitability.

Clients not engaging our Credit Risk Practice work with our consultants to incorporate internally or externally generated economic capital numbers into their profitability and SVA analysis.

Management Reporting Repository (MRR) Allows Historical Analysis
Upon engaging QRM, clients will establish their own MRR and perform backdated analyses to create a more accurate picture of historical profitability. As the engagement evolves, the Framework provides processes that maintain existing position transfer pricing results, while automatically detecting the need to transfer price new or curtailed transactions.

Our consultants will help refine the organization's reporting capabilities using OLAP reporting technologies, Microsoft Reporting Services, and other industry standard technologies. Since results are maintained at the transaction level, these OLAP-based reports can roll up and aggregate information over institution-specific hierarchies, like those for customer, business line, region, or product dimensions.

To ensure that management can see consistent numbers across the organization, our clients employ automated processes to ensure that the profitability hierarchies are consistent with the dynamic hierarchies housed in each clients' general ledger and/or reporting systems. Standard reporting includes all traditional profitability and SVA reports, which can be produced at any desired level using OLAP capabilities. Each client's reporting capabilities include the generation of profitability reports, variance reports, key performance indicators, and profitability dashboards.

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