Interest curves as basket of ratesInterest curves as basket of rates
Faculty of Applied Economics
Faculteit Toegepaste Economische Wetenschappen
Revue bancaire et financière. - Bruxelles, 2003, currens
1(2006), p. 32-38
This article describes the process of setting up a workable interest rate model that generates a set of simulated future interest rate curves consistent with current interest levels, current observed market volatilities, and economically sensible correlations. Likely applications are for example the calculation of loss distributions on bond portfolios or the derivation of a fair value of interest derivatives positions. Numerical examples are provided in an Appendix. The article indicates the reference publications along the way. Those publications are typically highly mathematical, which is no coincidence if one considers what the models try to capture. Consider the following graph, showing the weekly evolution of the 6 month, 9 month and 1 year up to 10 year EUR swap rates between 8 January 1999 and 30 September 2005. The most recent curves are the ones on the left1.