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Forwards and Swaps: Interest Rates Models: Bootstrapping the Zero curve and Implied Forward curve

A number of clients and students ask for a road map of sort through Learning Corporate Finance. Given the amount of material posted it sometimes gets confusing to walk the right path through the posts that you really need to see.

This road maps focuses on  bootstrapping the zero curve and using the zero curve to calculate implied forward interest rates (forward curve). We then used the projected forward rates to price the swap rate for fixed to floating interest rate swap. A separate series of posts build on this material and extend its reach to pricing interest rate caps, interest rate floors, range accrual notes, commodity and equity linked notes.

One word of caution. Please note that these models are being shared here for academic and learning use. There are a number of tweaks and adjustments that need to be made before they can be implemented in the real world. In addition you have to understand that projected forward rates only have limited forecasting capability. Just because the forward rate for the 3 year bond, 1 year down the road is at 13% does not mean that the 3 year bond will actually trade at 13%. It only means that if today you decide to sell the 3 year bond, 1 year down the road you can/should be able to hedge yourself at 13%.

Now without further ado:

Modelling the Term structure, zero curve and forward curve

The first set of three posts walk through an example of bootstrapping the zero curve and then using the curve to calculate the implied forward curve.

Forward and Swaps – Pricing Interest Rate Swaps (IRS) – Fixing the term structure
Forward and Swaps – Pricing Interest Rate Swaps (IRS) – Calculating the zero curve
Forward and Swaps – Pricing Interest Rate Swaps (IRS) – Calculating the forward curve

We can then use the projected forward interest rate curve to price Interest Rate Swaps, Caps and Floors.

Pricing Interest Rate Swaps (IRS) Basics

The second set of posts walks you through Interest rate swaps and the process of building a model that can help you value, price or MTM a single IRS or a portfolio of interest rate swaps. While the forward curve process was a little involved, the swap pricing piece uses a basic NPV tool.

Forwards and Swaps – Pricing Interest Rate Swaps (IRS) – Terminology and Notation
Forwards and Swaps – Pricing Interest Rate Swaps (IRS) – More terminology
Forwards and Swaps – Pricing Interest Rate Swaps (IRS) – What is a Swap?
Forward and Swaps – Pricing Interest Rate Swaps (IRS) – Process

Mark to Market (MTM), Pricing and Valuation

Forwards and Swaps – Pricing an Interest Rate Swap (IRS) – Calculating the MTM of the Swap
Forward and Swaps – Pricing Interest Rate Swaps (IRS) – Pricing Basis Swap
Forward and Swaps – Pricing Cross Currency Swaps (CCS)

If you would like to purchase and download the excel examples covered in this course, please checkout our online finance course store for handy pdf course cheat sheet downloads and solved excel spreadsheets and templates. If you need an option and derivatives product refresher, please see the introductory and intermediate courses below on Derivatives and Options products.

The Derivatives Crash Course for Dummies
Options and Futures basic products training course

Derivatives for Dummies – a first look at options and derivatives

A quick look at basic concepts and vanilla options as well as synthetic manufacturing of options at a higher level of detail. The Derivatives for dummies crash course is followed by an intermediate level course that reviews product variation and basic pricing concepts.

Options and Futures Training: Options and derivatives crash course: Terminology
Options and Futures Training: Options and Derivatives Crash Course: Forward, Futures and Options
Options and Futures Training: Options and Derivatives Crash Course: Payoff profiles – Forwards
Options and Futures Training: Options and Derivatives Crash Course: Payoff profiles – Options, Calls and Puts
Options and Futures Training: Options and Derivatives Crash Course: Synthetics

Derivative products

The second course on derivatives and options products digs a little deeper into products, pricing, sensitivities and product variations over ten easy to read chapters. Starting again from vanilla products we touch upon options on currencies and Forex, options on interest rates, forwards, futures an Interest Rate Swaps.

Options and Futures Training: Derivative Products: Review
|Options and Futures: Derivative Products: Vanilla Products
Options and Futures Training: Derivative Products: Pricing Basics
Options and Futures Training: Derivative Products: Greeks and Binomial Trees
Options and Futures Training: Derivative Products: Options on shares, stocks, currencies and equities
Options and Futures Training: Derivative products: Exotic Options
Options and Futures Training: Derivative products: Options on rates
Options and Futures Training: Derivative Products: Forwards
Options and Futures Training: Derivative Products: Futures
Options and Futures Training: Derivative Products: Swaps

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