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C# for Financial Markets by Andrea Germani, Daniel J. Duffy

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15

Single-curve Building

15.1 INTRODUCTION AND OBJECTIVES

In this chapter we introduce the curve construction mechanism to build an interest rate curve. This fulfills the need for a single valuation framework to consistently price all instruments. We cover the traditional, pre-credit crunch approach that considers a single-curve only for discounting and forwarding. It is interesting from a didactic point of view and it is a prologue to a relatively new approach that we discuss in later chapters.

After having introduced the idea of the interest rate curve, we give a basic overview of the instruments used as inputs as well as the main methods used in curve building such as bootstrapping and global methods. We highlight the role of interpolation in the process showing a practical use of the concepts described in Chapter 13. We present a solution in C# to manage the full process of curve building in a flexible way. Finally, we discuss some working examples and we provide a number of relevant exercises.

The software techniques that we use here have already been discussed in previous chapters. In particular, we assume that the following concepts and classes are familiar to the reader:

  • Data structure and collections (Chapter 5).
  • Lambda expression, delegates, interfaces (Chapter 4).
  • Generics (Chapter 6).
  • Year fraction and day count (Chapter 7).
  • Date schedules (Chapter 12).
  • Using DLLs (Chapter 11).
  • Interpolation (Chapter 13).

Moreover, some concepts are to be found elsewhere in the book: ...

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