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Abstract:
The term structure of interest rates is central to many valuation or risk management models. However, the construction of interest rate curves is no trivial task, and demands an in-depth understanding of the interest rate derivatives markets. It is our experience that some financial institutions do not pay enough attention to that question, and end up using very simplistic approaches, such as linear interpolation on swap rates.
In this workshop, we examine the genesis of the need for a modern multi-curve bootstrapping framework, which takes into account the larger basis spreads and the collateral agreements, which are now widely used.
We then review several market standard approaches to construct interest rate curves under this modern framework, and show the pros and cons of each methodology. In particular, we suggest “optimal choices” depending on the targeted application.
Who? This workshop welcomes everyone whose job is impacted by the interest rates problematic.
Agenda:
The term structure of interest rates is central to many valuation or risk management models. However, the construction of interest rate curves is no trivial task, and demands an in-depth understanding of the interest rate derivatives markets. It is our experience that some financial institutions do not pay enough attention to that question, and end up using very simplistic approaches, such as linear interpolation on swap rates.
In this workshop, we examine the genesis of the need for a modern multi-curve bootstrapping framework, which takes into account the larger basis spreads and the collateral agreements, which are now widely used.
We then review several market standard approaches to construct interest rate curves under this modern framework, and show the pros and cons of each methodology. In particular, we suggest “optimal choices” depending on the targeted application.
Who? This workshop welcomes everyone whose job is impacted by the interest rates problematic.
Agenda:
- Interest rate curve construction: context
- The basics: a simplistic approach
- The classical framework
- The modern framework
- The interpolation problem
- The choices: what and how to interpolate
- Theoretically accurate methods
- Piecewise-linear curves
- Cubic spline curves
- A practical shortcut: synthetic IRS quotes
- A comparison of approaches
- IRS pricing example
- The right curve for the right application
- More complexities
- Conclusion