FAQs

How Are Forward Curves Constructed?

Our forward curves are built using a combination of reliable market data and advanced methodologies:

  1. Data Sources: We use swap rates, forward rate agreements (FRAs), futures, and daily fixings (e.g., EURIBOR, SONIA) from reputable providers.

  2. Bootstrapping Process: A step-by-step technique ensures the curve is consistent with real market prices, starting with short-term rates and extending to longer maturities.

  3. Calibration: The curves are refined to align with observable market instruments, ensuring accuracy and usability for swap pricing and risk management.

This process provides precise, market-reflective curves to support informed decision-making.

What Is Bootstrapping in Forward Curve Construction?

Bootstrapping is a process used to construct forward curves by sequentially building from short-term rates to longer-term rates. It ensures that the forward curve is consistent with the pricing of financial instruments in the market. This step-by-step method allows for precise calibration to real market data.

Are Forward Curves the Same as Yield Curves?

Not exactly. While both represent interest rates over time:

  • Forward Curves project future interest rates based on current market prices.

  • Yield Curves show the interest rates of bonds (or other fixed-income instruments) with different maturities at a single point in time.

What Causes a Kink in a Bootstrapped Forward Curve?

Kinks or bumps in a bootstrapped forward curve often arise due to:

  1. Illiquidity: Certain tenors may lack sufficient market activity, causing irregularities in the derived rates.

  2. Demand/Supply Imbalances: Some maturities may experience higher demand or supply, influencing the pricing for those specific points on the curve.

  3. Data Anchors: Forward curves rely on market instruments (e.g., swaps, futures) at specific maturities. If data for one tenor differs significantly, it can create a bump.

Such kinks are most common in less liquid parts of the curve or where specific market instruments disproportionately impact the curve’s shape.

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