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s curves [392fd52f]

Tags: finance

1. Interest rate sensitive products are epxosed to market rates by different curves

1.1. S (swap and basis spread curves) and bond curves (F and M)

2. Definition

  • Swap curve built out of fixed coupon rates of market quoted interest rate swaps across different maturities in time.
  • Consists of a fixed leg and a floating leg
  • Swpa curves are constructed in segments from the market prices of various fixed income instruments
  • Short end of swap curve (< 3 months) is calibrated on unsecurted deposit rates
  • Middle area of the curve (3months - 2 years) isdervied from a combination of forward rate agreement congrats and interest rate futures
  • Long end of the curve is constructed from observed quotes of swap rates (out to 10 years or more)

  • Single currency basis spread curves are constructed from market quotes for basis swaps

    • Basis swap is a floating-floating interest rate swap under the floating rate payments are referenced to different bases

  • Used for

    • Pricing fixed income instruments such as corporate bonds, mortgage securities, and other securitized products
    • Price cash flows, swaps, FX forwards, and other derivatives