# What's Hedge Curve Template

what's a Hedge Curve Template (HCT)? How does it help value a bond?

It appears to me it normally is used together with another curve where x,y-axis being maturity dates and discount factors respectively. And it appears to fall into certain category known as market data map.

Sorry about being naive, I came from IT background, really know very little about quant finance. Googling didn't help much either...

A hedge curve template (HTC) is a specification of a series of scenarios against which you want to measure the risk of a financial instrument or derivative.

An HCT contains information about what instruments you will use to construct your curveset and the construction method of the curveset using those instruments, for example the interpolation scheme you might use.

As an example consider the following:

You have an (unspecified) GBP interest rate swap, $$P$$, to be 'risked' against different HCTs.

HCT 1, $$S_1$$

This template has one instrument, e.g. 10Y swap rate, and in its construction every rate on the whole curve is set to be the rate of the 10Y swap.

When you risk your swap against the scenario that the 10Y swap increases by 1bp you obtain the risk:

$$S_1(P) = [1000]$$

What does this tell you? It says that a parallel curve shift will give you some PnL, but this does not give you any information about the maturity of the swap.

HCT 2, $$S_2$$

Now suppose you have a HCT where you have 2Y, 5Y, 10Y, and 20Y with linear interpolation. When you risk your swap now against the scenario of each instrument increasing by one 1bp you get the risk:

$$S_2(P) = \begin{bmatrix} 0 \\ 800 \\ 200 \\0 \end{bmatrix}$$

What can you infer from this curve, well it seems like you swap is closely related to 5Y but a bit longer since it goes into the 10Y bucket.

Your swap is probably a 6Y swap in just under 2mm notional.

You can build an HCT for any scenarios you like. Basically the art is to create one that gives you the most accurate form of risk metrics with respect to potential market moves, but at the same time be simple enough to assimilate the information and be able to execute hedges in the market that are reliable. This is more difficult in practice and many traders are often unaware this is actually the point of well designed HCTs.