Quantifi, a provider of risk, analytics and trading solutions, has today announced the release of its latest whitepaper ‘Mastering Interest Rate Curve Construction’. The paper explores how 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.
Interest rate curve construction is a fundamental concept within quantitative finance: calculating the current value of any financial product requires multiplying expected values of cashflows by corresponding discount factors. 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. In this whitepaper, Quantifi explores key topics related to interest rate curve construction.
“Interest rate curve construction plays a central role in financial markets, underpinning the valuation and risk management of a wide range of financial instruments.“
Dmitry Pugachevsky, Director of Research, Quantifi
The paper explores the debate between single curve bootstrap and global optimisation techniques, emphasising the need to adopt dual curve discounting and global optimisation methods in response to the transformed market dynamics post-2008 financial crisis. It explains the challenges arising from circular dependencies between curves and underscores the pivotal role of global optimisation in the evolving financial landscape post-LIBOR. The whitepaper sheds light on the intricacies of constructing interdependent or “entangled” curves and introduces innovative methods to alleviate the reliance on global optimisation, with a special focus on the use of synthetic swaps as a simplification tool. Furthermore, Quantifi looks at the pressing issue of calibrating SOFR (Secured Overnight Financing Rate) curves in the wake of LIBOR discontinuation in 2023.
“Interest rate curve construction plays a central role in financial markets, underpinning the valuation and risk management of a wide range of financial instruments. Accurate and robust curve construction is essential for making informed decisions, setting benchmark rates, and managing risk effectively. Quantifi has developed a comprehensive solution to address the multi-faceted challenges of interest rate curve construction. By meticulously researching and refining global optimisation techniques, Quantifi has developed methodologies that demonstrate exceptional stability, precision, and performance,” comments Dmitry Pugachevsky, Director of Research, Quantifi.