This chapter will describe the elements that banks need to considerin mapping and analyzing financial contracts.
Markets, counterparties and behavior are the main input elements of all financial contracts, discussed extensively in Chapters 6, 7, 8. Time is a fundamental factor, which plays a central role during the lifetime of the financial contracts.
There are two important parallel dimensions of time; these are the actual and simulated ones. However, the treatment of time contains some great challenges including its scale and the length of iterations set by day count conventions. Linking the above elements to the mechanism of the contracts, expressed as contractual rules and translated into mathematical functions, different patterns are defined with the most major ones referring to principal, interest, credit enhancements, and behavior. Here we describe the evolutions of such patterns driven by the contractual rule parameters and executed at fixed or variable time cycles.5.1
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