Podcast #128: We chat with Kent C Dodds about why he loves React and discuss what life was like in the dark days before Git. Listen now.

Questions tagged [discounting]

The tag has no usage guidance.

Filter by
Sorted by
Tagged with
8
votes
1answer
607 views

$\mathbb{P}$ vs $\mathbb{Q}$ Probabilities - Transitioning Between Measures

I'd like this question to definitively guide a practitioner to using both $\mathbb{P}$ vs $\mathbb{Q}$ probabilities in trading and research. Let's take only one fact as given: if I have a risk-...
6
votes
3answers
4k views

Why do we discount in ois and not treasuries

OIS is the 1-day non-collateralized interbank interest rate. Such a rate is not risk-free. The market trades a very useful curve that is much closer to "risk-free": the government bond curve. So the ...
6
votes
1answer
2k views

Why are multiple custom curves (swap) built for one desk?

Currently in a journey of learning and getting my hands a bit dirty with Interest Rate Swaps. Why there are multiple customized curves built by many even within one desk? For e.g. Short Rates desk ...
5
votes
1answer
261 views

Discount curve and payment frequency

In case of uncollateralised trades, where we use LIBOR rates for discounting, does the LIBOR tenor have to match with the payment frequency? For example, one of the swap leg pays USD floating amount ...
4
votes
1answer
358 views

Risk-neutral expectation equation with collateral and funding costs

I am looking at a paper by V. Piterbarg, Funding beyond discounting: collateral agreements and derivatives pricing, that you can download on the following link, in which the author adapts the Black-...
4
votes
1answer
2k views

Cheapest-to-deliver (CTD) discount curve

Can someone explain, in layman's terms, the mechanics (the algorithm steps) of the construction of the discount curve in the case when the CSA allows the posting party to choose a currency (from a ...
4
votes
1answer
4k views

What exactly is the OIS Black VOL?

While poking around in Bloomberg I stumbled upon the following data set: EUR SWPT BVOL OIS for various maturities. Obviously OIS must suggest OIS-discounting but how is it related to the Black-...
4
votes
1answer
109 views

Discounted asset price is martingale in BS model

I want to verify that the discounted stock price process $\mathrm{e}^{-r(T-t)}V(S_t,t)$ is a martingale in the BS-model. Using Ito's formula and the BS-PDE I get that $$ \mathrm{d}\mathrm{e}^{-r(T-t)}...
3
votes
3answers
885 views

Two different ways of pricing that leads to two answers

This question might appear trivial to many (considering the questions on this site), but I think it reflects something fundamental that I am missing. To keep things simple, assume everyone is risk-...
3
votes
2answers
193 views

expected change in value of a derivative in a multicurve framework

I'm reading Piterbarg paper, "Funding beyond discounting: collateral agreements and derivatives pricing." and have a question about equation $(6)$. There he says that for a derivative we have $$E_t[...
3
votes
1answer
65 views

Proof that we can price any derivative as the discounted value of its expected return under the risk neutral measure

I am reading a paper which tries to convey the intuition behind the Black-Scholes pricing formula. In that paper, the author states the following two things without proof, and I would like to know why ...
3
votes
2answers
98 views

Correct Discount Curve for Exchange Traded (Centrally Cleared) Products

What's the correct discount curve to use for exchange traded products? Would these be discounted at the OIS rate (because of the central clearing house)? E.g. the E-Mini S&P500 Future @ CME: I'm ...
3
votes
1answer
134 views

Bootstrap ESTER and SOFR curves with Quantlib Python

Is it possible to bootstrap the new ESTER and SOFR term structures in Quantlib? More in general, does the process work as the usual one? Given these are simple indices that are published on a daily ...
3
votes
0answers
613 views

Properties of Geometric Brownian Motion Integrated w.r.t. Time (i.e., distribution of a Yor Process)

Let $S_t$ be a process which follows a Geometric Brownian Motion: $\frac{dS_\tau}{S_\tau} = \mu \,d\tau + \sigma \,dW_\tau$ By Ito's lemma, we have: $S_T = S_t e^{(\mu-{\sigma^2 \over 2})(T-t) + \...
2
votes
2answers
71 views

What is the difference between a cleared interest rate swap and a OTC interest rate swap with collateral in theory

I understand the aspect that central clearing reduced counterparty risks. From the valuation side, am I right that cash flows for both trades will be discounted at the OIS rate? The party that holds ...
2
votes
1answer
3k views

Discounting Curve in Quantlib/Python

I'm using Python 2.7.12 with the QuantLib package. I'm trying to price fixed bonds. I understand how to create a bond object. How to get the "right" discounting curve is kind of a problem. Assuming a ...
2
votes
1answer
115 views

Recommended Instruments (and sources) for Constructing Money Market Yield Curves

What instruments are the current industry recommendations for constructing money-market yield curves in some major currencies? The switch after the crisis to multi-curve methods is well documented on ...
2
votes
1answer
256 views

Dual discounted forward curve

I was wondering how to calculate the forward rates based on OIS discounting for the half year terms. I know how to do this for the full year terms -> just making sure that the two legs are equal to ...
2
votes
1answer
175 views

Discount factor

Suppose we have : $r$ - zero coupon rate, constant over time, $n$ - a number of years (an integer), $\theta$ - a fraction of a year $(\theta < 1)$ , calculated with the relevant day count ...
2
votes
2answers
210 views

Is an options implied dividends DCF model consistent with risk neutral/arbitrage-free valuation?

We're talking about how we price every financial instrument: by discounting the payoff, that is, we take future cash flows and we discount them by a proper rate which takes into account the risk of ...
2
votes
1answer
4k views

Z-Spread vs Discount Margin

I'm comparing two types of discounting: Z-Spread and Discount Margin. Reading the article by O'Kane Credit Spread Explained I found Z-Spread is used for fixed rate notes meanwhile Discount Margin, ...
2
votes
1answer
1k views

Which discount curve to use when valuing multi currency swaps

I've been looking around the internet but cannot find the exact answer to my question. Normally when valuing an IRS one uses eonia (for eur swaps) to discount the cashflows. Let's imagine I have a ...
2
votes
0answers
34 views

Calibration of stock's intrinsic value under the gordon model

Assume we have the constant growth Gordon model, for a stock paying dividend $D$,Earnings per Share $EPS$, annual growth rate $g=ROE*(1-\frac{D}{EPS})$ and discount rate $r$. Then: $IV=\frac{D*(1+g)}...
2
votes
0answers
156 views

Discount rate in IRS valuation

This might be a very basic question but I didn't find the answer in the materials I saw on Google. What is the interest rate used to compute the discounted cash flows for both the fixed and variable ...
2
votes
1answer
59 views

What is time 0 price of Libor starting t for the period $t$ to $t+\delta t$

I was asked this in an interview. The correct answer, I was told, follow from this argument Let $L_0[0,t]$ denote the time 0 price of Libor for period $0$ to $t$. Let $L_0[t,t+\delta_t]$ denote the ...
2
votes
1answer
361 views

Discount factor taking into account yield curve shape

I have always been told that the discount factor formula is just: $$ DF(T) = \frac{1}{(1+L_{t_0})^T} $$ where $L_{t_0}$ is the LIBOR rate on one period (the first one I guess) and $T$ the number of ...
2
votes
0answers
54 views

Can I use these rates for ACT/360 discounting?

I have calculated forward rates like this: $r_{t_1,t_2} = \left(\frac{(1+r_2)^{d_2}}{(1+r_1)^{d_1}}\right)^{\frac{1}{d_2-d_1}} - 1 $ I want to find the discount factors for these forward, with ACT/...
1
vote
1answer
157 views

Bond discounting conventions

during the preparation for my thesis, I've come across some strange discrepancies between literature and the information I've been taught. It comes down to the proper way of discounting cash-flows of ...
1
vote
3answers
159 views

Does the traditional NPV formula of a cashflow double count risk?

Consider a cash flow stream of a single payment (1 period away). Its net present value is typically presented as $$ \text{NPV} = {\text{EV}(\text{Cash Flow}) \over 1 + d} \tag{1} $$ Here $d$ is ...
1
vote
1answer
352 views

ESTER replacement for EONIA/EURIBOR

Does anybody know what impact the replacement of EONIA with ESTER ( Euro Short TErm Rate ) will have on discounting existing or new derivatives once EONIA will be restricted as of Jan 2020? I'm ...
1
vote
2answers
4k views

What is the EUR swap curve on Bloomberg? I.e. what is the EUR equivalent of S23 curve on Bloomberg?

I am trying to understand the currency basis calculation and whether there is a difference in currency basis when quoted vs. OIS and -IBOR rates.
1
vote
1answer
84 views

Why use the risk-free rate for discounting in a risk neutral world?

I am reading Options, Futures, and other derivatives by John C. Hull. In the chapter on Binomial trees, he remarks: A risk-neutral world has two features that simplify the pricing of derivatives: ...
1
vote
1answer
201 views

Characteristics of a Discount Curve

Does the discount curve used for discounting cash flows have to be a zero coupon, annual compounding, actual by actual day basis curve? In practice, does a curve used for discounting necessarily have ...
1
vote
1answer
759 views

For IFRS9, losses should be discounted with the EIR, why is that sensible?

Within the IFRS9 framework it is stated that one needs to determine the expected losses and discount these with the effective interest rate (EIR), i.e. the contractual rate at initiation. However, I ...
1
vote
1answer
47 views

Continuously Compounded rate less than a discretely compounded rate [closed]

I'm looking at an example in a well known book and its saying "consider an interest rate that is quoted as 10% per annum with semi annual compounding" The book puts 10% as the semi-annual rate, ...
1
vote
1answer
89 views

Macaulay's Duration with Zero Rates

The definition of Macaulay's Duration is the weighted average maturity of cash flows and is calculated as- $$D_{mac}=\frac{\sum_ttPV(C_t)}{V}$$ where $PV(C_t)$ is the present value of the cash flow ...
1
vote
2answers
125 views

Why to 2 methods to calculate bond price with semi annual return give different answers?

I am confused as 2 methods give different answers. The difference lies in the "to the power" numbers for discounting. Example: 2 year semi annual bond (4 periods), $1m annual Coupon Payment, 5% Yield ...
1
vote
1answer
2k views

What is the proper discounting of PIK and non-compounding bullet loans?

This question pertains to two types of loans. Pay-in-kind (PIK) and bullet loans with quarterly payments. 1. PIK Loans A PIK loan is a loan where periodic interest is NOT paid, but added to the ...
1
vote
0answers
55 views

discount factor, zero rates, zero curve from BBG

How can I calculate the discount factor for row 1? I would do $$ \frac{1}{(1+ 2.13763/100)^{(90/360)}} = 0.994726197703956 $$ My ultimate goal is to reproduce the Zero Rates. Any hints welcome. ...
1
vote
0answers
40 views

Discounted Costs [closed]

Suppose we were given a discounted cost of £12,956. This was generated using a discount factor of 3.5% and a time-horizon of 45 years. Is it possible to obtain what the non-discounted cost is today?...
1
vote
0answers
46 views

Discounted self-financing portfolio still a self-financing portfolio?

Assume a self-financing portfolio $V_{t}=\theta_{t}^{0}S_{t}^{0}+\theta_{t}S_{t}$ with $S_{t}^{0}$ the value of the non-risky asset at time $t$ and $\theta_{t}^{0}$ the amount of shares of the non-...
1
vote
0answers
81 views

Why don't we build the discounting curve and projection curve from bonds

We know that we always build the discounting curve and projection curve from money market instruments, index Futures, interest rate swap and OIS Libor swap (depends on the period). But why don't we ...
1
vote
0answers
23 views

Source for derivation of acquisition price for given IRR and cash flows

Does anyone know a quotable source - book/academic or practitioner's paper - that derives the acquisiton price for a target firm when the buyer's desired IRR and all cash flows over time of the target ...
1
vote
0answers
30 views

Monthly Discount Rate in NPV Calculation [closed]

I have been offered 2 payment methods as I was buying some tools for a company I work for. I need your help to assess the best method. Here it goes, Total cost is $100 and I don't want to pay it all ...
1
vote
0answers
69 views

Is the discount rate the same for all market participants?

When determining what to pay for a company or asset people typically discount the future cashflows by the cost of equity, which is defined as the 'risk free rate' ...
1
vote
0answers
53 views

Should cash-flows discounted at WACC be pre- or post-tax?

WACC in my mind is effectively a post-tax measure: $$\text{WACC} = \frac{E}{V} k_e+\frac{D}{V}k_d(1-t)$$ In this case should cash-flows, in particular loan cash-flows be adjusted for tax as well? ...
0
votes
1answer
158 views

When to use what discount rate?

By discount curve $D(t)$ I mean the discount rate applied to a cash payment or receipt at time $t$. What is the correct terminology to use? I have seen the term "yield curve" thrown around, but I'm ...
0
votes
2answers
113 views

Calculation VaR on long term period

I'm calculating VaR numbers from historical data for a single instrument (it's plain vanilla, not a derivative) and receive such variables: I could provide necessary data, and formulas but I guess ...
0
votes
2answers
152 views

Does a 1Y swap depend on zero curve beyond the 1Y point?

When using market swap rates to calibrate a discount curve, it seems that the PV of a 1Y swap depends on the zero curve at points beyond the 1Y mark. For example, a USD 1Y swap with trade date today (...
0
votes
1answer
50 views

Can someone explain to me the intuition behind the discount factor for this simple payoff? [closed]

Let's say you enter into a contract today in which in time t, you receive the difference between the underlying stock price and 100. Denote the stock price as S. Why is today's value of such a ...