Joined: Jun 2011
Mon Jun 20, 11 10:31 PM
First of all, thanks for your answer, it settles some things up in my mind
Originally posted by: DavidJN
There are three different kinds of yield curves that people generally work with: par, zero and forward. Given any one of these you can derive the other two.
Yep I forgot that there are formulas relating these three kinds of rates ! And I didn't know the yield curves were only for those 3.
A good deal of yield curve modeling consists of transforming observable par rates into zero rates or forward. This is a static procedure in the sense that the transformaiton is done at one point in time.
A yield curve model is something different. Examples are the HJM, HW and LMM models. These model the stochastic evolution of the yield curve over time and take either the zero curve or the forward curve (depending on the specific model) as an input. Yield curve models are typically used to price derivatives based on interest rates.
So, are you building a zero curve from a par curve or are you interested in pricing derivatives using a yield curve model? Both?
Sorry, I didn't get into much precision, because it's a work I want to myself as much as possible. But I'm selecting some stochastic models and the ones that really interest me are zero curves (I think it's called 'term structure' ?) from which I would like to get the (forward) swap/par rates. The data I'm given can be spot rates or swap rates, preferably the latter.
I also prefer models that are simply implemented, rather than very precise implementations.
Also, I've had my own idea on the question but I'd like to get a confirmation : what's the main advantage of a no-arbitrage model compared to an equilibrium model ?
And I need another confirmation : can short rates be used for a 6-month maturity ?
Sorry, last question... I've already read the chapters about yield curves in Hull's "Options, futures, and other derivatives", would you happen to have another good reference about yield curves, especially their calibration ?
Thanks a lot (it's not a problem if you don't answer to all the questions I'm just in a great period of doubt and need some double-check answers)
Edited: Mon Jun 20, 11 at 10:32 PM by Tootient