Questions tagged [discounting]

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Using Integrals With Internal Rate of Return?

I'm taking a Calculus 2 course this Fall, and for my honors project, I will be using the IRR function. My professor is requesting that I figure out a way to use an integral with the IRR. The cash flow ...
39 views

Why Bloomberg USD swap curve (YCSW0023 Index) changes last month?? and why put a Financial commodity future into this curve?

The Bloomberg USD swap curve (YCSW0023 Index) had changed and bloomberg put a Financial commodity future. Why changes? What the factor make this changes? Why bloomberg put into a financial commodity ...
51 views

83 views

Find out the effective monthly discount rate for a 10% annual discount rate

First time posting. Apologies in advance if this is not the right question for this forum. If it is, please let me know if I should reformat this in a particular way. If it isn't, would it be more ...
136 views

Discounting for XVA

I was thinking that since XVA is on uncollaterized exposure, we should be using LIBOR discounting environment. Why don't we do that?
76 views

Arbitrage when discounting and forward computation is done with different curves

I notice that (equity derivatives) trades generally are priced with different forward curve and discounting curve, which clearly lead to arbitrage. Is this arbitrage value too small to be ignored? How ...
69 views

Interest rate calculation [closed]

The task: With what interest rate given 2000 Euros after 2 years and 3000 Euros after 4 years, the actual value will be equal 4000 Euros. This task sounds confusing for me, I tried to calculate, but ...
97 views

Formula for the discounted payoff of a digital option

In "Heard on the Street" it states that the expected discounted payoff of a digital option is $$H\exp^{-r(T-t)}N(d_2)$$ where $H$ is the payoff of the option, the exponential is the discounting. ...
853 views

Calculating the Discount Margin for a FRN

I am working with a programming case where there are two methods of calculating YTM / discount margin for bonds and FRNs. Both methods use an iterative approach to find a rate / spread that ...
85 views

Discounting in multicurve environment

Given that the longest tenor for LIBOR in 12M, what rate do we use to discount a cash flow due in, say, 18 months? Some suggest that we use the 12M rates for 1 year and 2 year to interpolate, but ...
174 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. ...
579 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 ...
335 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 ...
40 views

Discounted Costs [closed]

Suppose we were given a discounted cost of Ā£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?...
81 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 ...
34 views

OTC equity option under foreign currency CSA

What adjustment do I need to make to the Black-Scholes equation when the CSA of an OTC equity option is in a different currency than the underlying in order to get the correct price? For instance, ...
179 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 ...
158 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 ...
71 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 ...
335 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: ...
660 views

Mark-to-market cross-currency basis swap valuation

I'm looking to replicate the EUR vs USD cross-currency basis curve that Bloomberg outputs (EUR.OIS collateralized in USD). I understand that Bloomberg is currently using the mark-to-market ...
150 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 ...
24 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 ...
52 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, ...
184 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 ...
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What discount rate for uncollateralized cross currency swaps?

To expand on this question, what happens if the uncollateralized swap is of a cross currency variety? Ignoring any xVAs, it's unclear which currency would best determine the discount rate: a) we ...
231 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 ...
3k views

Bloomberg terminal swap zero curve calculation

I would like to ask about swap zero curve calculation algorithm by Bloomberg terminal. This is a plain vanilla CZK interest rate swap, fixing the Prague IBOR. My task is to calculate zero rates from ...
306 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 ...