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Are you sure you are doing it right? Interest rate curve construction: a review of the modern framework

About this event

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.

Agenda:

  1. Interest rate curve construction: context
  2. The basics: a simplistic approach
  3. The classical framework
  4. The modern framework
  5. The interpolation problem
  6. The choices: what and how to interpolate
  7. Theoretically accurate methods
  8. Piecewise-linear curves
  9. Cubic spline curves
  10. A practical shortcut: synthetic IRS quotes
  11. A comparison of approaches
  12. IRS pricing example
  13. The right curve for the right application
  14. More complexities
  15. Conclusion

Hosted by

  • Team member
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    Reacfin Academy

    Reacfin is a consulting firm focused on creating measurable value & results for its clients. Our mission is to develop innovative solutions to manage risks, products, capital & portfolios.

  • Team member
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    Frédéric Vangheluwe Associate Partner @ Reacfin

    Before joining Reacfin in 2020, Mr. Vangheluwe performed most of his career at BNP Paribas Fortis (previously Fortis Bank) which he joined in 1987. He evolved over the years within the Global Markets department of the bank and within the Investment Bank of the group.

  • Team member
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    Antoine Gustin Consultant @ Reacfin

    Antoine joined the Risk and Finance Center of Excellence at Reacfin in February 2019. Since then, he has been involved on a number of technical projects in both banking and insurance, in which he took an active role on quantitative modelling aspects.

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