Modern Yield Curve Stripping & Interest Rate Risk Management

This class will tackle about the problem of Yield Curve Stripping. Nothing is overly complicated, however there are a lot of different algorithms and 'the devil lies in the details'.

As the Interest Rate market is very liquid and competitive, any mistake can lead to an arbitrage in your valuation. Your Yield Curve modeling will also have a strong impact on your Risk Management.

Master the best practices for Yield Curve Stripping.

• The Risk Free Rate, Bonds and Swaps and their market conventions

• Simple Stripping of the Yield Curve

• Interpolation of Zero Coupon Rates

• The concept of Forward Spread

• Step Wise stripping to model central bank behaviour

• Stripping with your own funding

• All the concepts are illustrated in downloadable Excel spreadsheets

Learn to implement a non arbitrable Yield Curve Model

With the introduction by the regulators of the new Risk Free Rates like €ster or SOFR, yield curve pricing model must be even more precise. A proper yield curve stripping must use several different techniques, and all of them must be applied without any mistake.

All the algorithm will have a practical, detailed and downloadable example on Excel

Content and Overview

The goal of this course is to compute Discount Factor and Forward Swaps, while having a sound risk management framework.

The first part of this course will present the Interest rates, the Central Bank role and the RFR (Risk Free Rate)

The Pyramid method will be presented, as it is simple and leads to acceptable result, but it has strong limits.

Then modern stripping will be applied to a swap curve with its associated risk management, using a simple linear interpolation for Rates.

Because linear interpolation is arbitrable, you will be presented with the step spline algorithm. The Risk implications of the interpolation are important and will be seen in detail.

In order to cover all products and market specific, advanced techniques will be presented and analyzed in Excel.

With all these tools, student will be able to develop their own interest rate stripper, using a object oriented language.