0
$\begingroup$

I understand the concept of bootstrapping and building the curve when we have the values for first few maturities. However, I can't quite get how the initial values for zero curve rates are derived from tradable instruments. As I understand, these values are directly implied from OIS par rates.

Can someone please clarify, how, given, say a 1M OIS swap bid and ask, can I get the zero curve point at 1M maturity?

$\endgroup$
1
$\begingroup$

I think I figured it out. The problem was with day count conventions.

OIS par rate bid/ask are quoted in 360/ACT form, while zero curve rates are universalized to ACT/ACT (or whatever else is desired by the end user). Therefore, to get the zero rates, mid price of OIS swap is used to find the discount factor as 1/(1+r)^t(360/ACT) from which then zero rate r0 can be backed out 1/(1+r0)^t(ACT/ACT). So, they are essentially same thing, with a desired day count adjustment.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.