Advanced OIS Curve Building Approaches: Improving Accuracy at the Short End of the Curve

Most derivative market practitioners now use Overnight Index Swap (OIS) curves for their discounting curves when valuing cash-collateralized derivatives. Since the switch to OIS discounting began several years ago and is now standard practice in the industry, the process of building OIS curves must be well understood and extremely accurate by now, right?

Not exactly. While most of the issues related to OIS and dual curve stripping have now been resolved in the industry, some practitioners are discovering issues with the widely used bootstrapping methodologies. Traders of short-dated interest rate derivatives are finding that common bootstrapping approaches may not reflect certain OIS market dynamics very well, and this affects the construction of the short end of the curve – and therefore the pricing and risk calculations on their trades.

In the current low rate environments of the US and other developed markets, these inaccuracies have minimal impact on derivative valuations and hedging – for now. However, when rates start rising due to monetary tightening by central banks, the inaccuracies will become more pronounced.

In this webinar recorded on Tuesday, September 10, 2013, featured speaker Mark Hadley, Vice President of Financial Engineering, discussed ways practitioners can enhance the bootstrapping process for the short end of OIS curves, and how these new approaches will become more important as rates rise.

Mr. Hadley discussed:

  • Curve construction basics for the short end of the OIS curve
  • Nuances of short term rate dynamics
  • Federal Open Market Committee (FOMC) meeting dates and changes in Fed Funds rates
  • Year-end “turn” effects and other seasonality factors in OIS rates
  • Incorporating FOMC dates and seasonality factors into curve construction
  • Why this matters in a rising rate environment
  • Impact of the new approaches on short-dated interest rate derivatives
  • Changes to valuations and Greeks
  • Case study with examples

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