Questions tagged [discounting]

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2answers
6k 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.
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1answer
249 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 ...
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1answer
192 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 ...
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1answer
1k 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-...
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1answer
199 views

Up-front settlement of forward contract

One has entered a forward contract to purchase oil at $F_{t,T} = S_{t}e^{(r_f + s - c)(T-t)}$. The contract is entered at time $t$ and executed at time $T$. Where: $S_{t}$ is the spot price at time $...
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1answer
5k 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, ...
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2answers
432 views

What Is the correct discounting, risky or riskless?

Suppose I can sell a European put in two ways: 1) in a mark to market collateralized market with collateral rate equal to the riskless rate $r$; 2) in a noncollaterized market where I get the payment ...
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3answers
5k 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 ...
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1answer
80 views

Integrating Interest and Dividend Functions

How are interest rate and dividend functions integrated over time in practice? For example, what does it mean in practice to discount a current price by $e^{\int_{t_m}^{T}r_s ds }$ where $r_s$ is the ...
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1answer
339 views

Net present value when cash flows accrue continuously and are stochastic

I am trying to find a closed form solution to a stochastic integral -- which is really just a generalized expression for the expected net present value, $E^*[V_t]$, of an annuity (or perpetuity if $T \...
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1answer
37 views

How to come up with this present value in this question? [closed]

I'm starting to learn corporate finance on my own and have read about this question: You sell the rights to screen a film on TV once every two years for €0.8m. The film has just been screened. You ...
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1answer
1k views

Exponential Discounting of Cash Flows [closed]

I wonder for exponential discounting method to do the discount cash flow, may I doing it right as the following screenshot from Excel, assuming the discount rate is 4%? Thanks!
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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
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1answer
60 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 ...
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0answers
77 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' ...
4
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1answer
397 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-...
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0answers
55 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? ...
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1answer
1k 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 ...
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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 ...
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1answer
197 views

example regarding zero coupon bonds

This example is from Interest Rate Models: an Infinite Dimensional Stochastic Analysis Perspective by Carmona, René, Tehranchi, M R. I am wondering if the calculation is correct?, he says ...
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1answer
151 views

Pricing of Interest rate swap with start ex. 01/06/2015 to 03/06/2015 - 2 extra days? Change discount factor and fixed payments?

I hope you can help me. So let say we have an interest rate swap, with the following characteristic: Start in 30/06/2015. End in 02/07/2019 It has fixed payment every year, and floating every ...
3
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2answers
208 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 ...
2
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1answer
379 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
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1answer
198 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 ...
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2answers
178 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 (...
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0answers
56 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/...
2
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1answer
281 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 ...
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2answers
134 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 ...
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1answer
248 views

Finding Discount Bond Matrix in LMM Model C++

I am working on a 1 Factor Libor Market Model (LMM) in C++ and I working my implementation of the formula to find my Discount Bond matrix via the following formula: In the case of my model alpha is ...
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3answers
904 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-...
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1answer
63 views

Discounting factor depends on [closed]

Does discounting factor only depends on issuer, or it also depends on structure of payments ( i.e. fixed or float)? Thank you in advance.
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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 ...
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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 ...
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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-...

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