Mastering Interest Rate Curve Construction

Banks, investment firms, and other market participants value and manage large notionals of interest rate derivatives, bonds, loans, structured products, and other cash instruments that are sensitive to changes in interest rates.

Building an accurate and robust interest rate curve has considerable implications for a broad range of financial operations, from setting benchmark rates to managing risk, and hinges on the use of liquid market instruments. These instruments, such as interest rate swaps, futures, and government bonds, provide insight into the market consensus about future interest rates to enable accurate pricing. The prices of liquid market instruments are less susceptible to market manipulation or distortion as high trading volumes contribute to a robust price discovery mechanism, meaning the interest rate curves derived using these instruments are more reliable, less prone to anomalies, and reflect true market conditions.

Liquid instruments are also essential for quick and low-cost entry and exit of hedging positions, but it should be noted that the most liquid securities and tenors are not necessarily the ones that make curve construction most robust. It is important to incorporate techniques that can adapt to a variety of different combinations of instruments and handle the inherent complexity therein.

To navigate the complexity of rate curves and products, financial institutions must either build their own analytics and risk system or leverage third-party solutions. While the specifics of these solutions can vary considerably, they all must incorporate essential features to effectively address these challenges. The key features include:

  • Comprehensive interest rate coverage across products: support for rate products such as repos, bonds, futures, forwards, IR and XCCY swaps, caps/floors, swaptions, curve options,
  • scripted IR payoffs and their numerous variations.
  • Flexible curve construction: the ability to calibrate curves to wide range of market instruments, often with overlapping quotes that require joint fit or disentanglement, as well as modelling central bank dates etc.
  • Live risk: particularly important for buy side is the ability to observe their P&L and basic rate sensitivity in live, dynamic updates.
  • Sensitivities: being able to calculate sensitivities per curve, per tenor, and per instrument used for the calibration, alongside the capacity to derive sensitivities to zero rates and reproject to instruments beyond those employed in the calibration process.
  • Flexible interfaces: maintaining a consistent interface to trading and risk management tools, such as Excel spreadsheets or applications written in Python or Java, is very important for traders engaged in analysis and structuring activities.


  • Single Curve Bootstrap Versus Global Optimisation
  • Entangled Curves
  • Calibrating SOFR Curves
  • Tackling Curve Complexity
  • An Innovative Approach to Curve Construction

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