Volatility of Equity Calculation

The Advanced EVE module of IRR-Solutions® II is designed to measure the value of a financial institution's equity if the assets and liabilities of the institution were subjected to an immediate interest rate shock.

The model measures the present value of the cash flows for each individual item in the balance sheet.  By determining the net between the asset valuations and the liability valuations, the effect on the institution's capital is provided for each shock scenario.

The valuations in the +/- 0 (No Change) scenario, based upon the assumptions entered into the model (discount, index rate & prepayment assumptions), are viewed as the current market value of the institution.  They provide the starting point for the volatility calculation of the other shock scenarios.

An alternate approach could be that the volatility is measured from the institution's current book capital position, which would provide the No Change scenario also with a volatility measure, as well as change the volatility measures of the other scenarios.

It has been our experience that the first approach, as taken by the FinSer model, is the preferred and accepted method of viewing the institutions volatility by auditors/examiners and is used in both the Advanced EVE Summary and Advanced EVE Detail reports provided in IRR-Solutions® II.