2
$\begingroup$

This could be a trivial question, but would I like to clear the concepts.

Our firm started sourcing the Murex Trades which has all the variety of Derivative products. I noticed that the Curve Assignment service has two types being Used:

  • Discount Curve
  • Forward Curve

I noticed that both curves are mapped to most of the products. Can you please confirm the following:

  1. In general whats the criteria for selection of the type of curve?
  2. Does it generally differs for Short Term maturing Products and Long Term maturing products?
  3. Do we need to consider both curves for Credit Risk purpose?

Thanks in advance

Improve this question
$\endgroup$
1
  • 2
    $\begingroup$ Even for the simplest product such as a vanilla swap, you need at least one forward curve (e.g., 3M LIBOR forward curve) for cash flow generation, and a discount curve (e.g., OIS discount curve) for computing present values. Try searching for "multi-curve" and there are many answers already. $\endgroup$
    – Helin
    Sep 26, 2017 at 0:00

1 Answer 1

Reset to default
-2
$\begingroup$

You should first understand the difference between a forward rate and a zero rate. The zero rates are what you would normally think of: the discount factor to get the value of a cash flow today. The forward curves are implied discount factors calculated using zero rates which give discount factors in the future under no arbitrage assumptions.

The computation of forward rates are trivial. Wiki reference is the best if you forget the calculation: https://en.wikipedia.org/wiki/Forward_rate

  1. It's a function of what you want to discount. For example, if you were valuing cash flows in the future, (i.e. interest rate swap), you would use a forward curve.

  2. Depends on the product

  3. Depends on the product

Improve this answer
$\endgroup$
2
  • 2
    $\begingroup$ No. you are confusing the forward rates computed from a zero coupon curve and a forward curve. A forward curve is not a curve of forward rates. A forward curve is a zero coupon curve used to compute the forward (i.e. the expectation under the payment date risk neutral measure) cash flows in the case of interest rate deals (e.g. swaps). The discount curve is a zero coupon curve used to discount the expected cash flows back to time t=0. $\endgroup$
    – Antoine Conze
    Sep 26, 2017 at 7:53
  • $\begingroup$ Thanks.I understand the difference between those rates.Was checking the usage of the same.What I am looking for scenarios/Products where both will be applied .For Example a simple Coupon Bond what are Scenarios/examples where Discount Rates will be used and what scenarios where forward rates will be used . Thanks $\endgroup$
    – georgeb
    Sep 26, 2017 at 13:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

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