How Forward Rates Are Calculated

Accurate forward curves are central to our platform, offering users clarity and confidence in financial modeling. Here’s how we build them:

1. Our Data Sources

To create the most precise forward curves, it's essential to begin with reliable data. We source our data from reputable providers, ensuring a comprehensive and accurate representation of market conditions.

How Our Providers Gather Data

Our data providers are deeply connected within the financial ecosystem. They gather data through a variety of means, including:

• Interactions with Brokers: Brokers play a central role in financial markets, facilitating trades and negotiations between parties. Through their extensive networks, brokers have access to a wealth of real-time trade data and pricing information.

• Electronic Trading Platforms: Modern finance has seen a significant rise in the use of electronic platforms for trading. These platforms offer a snapshot of live market activity, including the volumes, prices, and participants involved.

• Direct Market Participants: Engaging with institutions, hedge funds, banks, and other market participants provides an additional layer of data, ensuring a holistic view of the market landscape.

Building on the data from these sources, we base our curves on the following financial instruments:

• Swap Rates: Think of these as the fixed rates in a swap agreement, helping to determine the costs or returns of various financial transactions over time.

• FRAs (Forward Rate Agreements): Essentially, these are agreements that determine an interest rate to be paid at a specified future date. They're like 'forward bookings' for interest rates.

• Futures: These are contracts agreeing to buy or sell a particular asset at a set price in the future. They give us insights into market expectations.

• Fixings: These are daily rates, such as EURIBOR, that represent the average interest rate at which major banks lend to one another.

2. Bootstrapping Process

To derive our forward curves, we utilise a method called "bootstrapping". In simple terms, bootstrapping helps us build a curve from shorter-term rates to longer-term rates, ensuring that the derived curve aligns with market prices.

The idea is to figure out what future interest rates would make our current financial instruments fairly priced in today's market. This process ensures our curves are grounded in real market data and expectations.

3. Constructing the Forward Curves

With the rates derived from bootstrapping, we can then construct our forward curves. These curves offer insights into the market's expectations of future interest rates. Understanding these expectations is key for anyone involved in debt financing as it can influence decisions on borrowing or lending.

These forward curves play a pivotal role when assessing the value and risks associated with different financing tools, especially swaps.

4. Swap Pricing Models

Utilising the forward curves, we then proceed to our swap pricing models. These models help users assess the future cash flows associated with interest rate swaps, ensuring that they can make well-informed financing decisions.

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We trust this guide offers clarity on our forward curve construction process.