SWAP Yield Curves
Swap -curve framework is based on OIS, FRA, SWAP Basis Spread and SWAP market prices.
To solve short term interest rate, we use following equation:
To calculate Synthetic Deposit for unknown terms, we must approximate the ON-x basis by using polynomial function, which degree x (normally 3):
By solving coefficients (α,β,γ) we can get value for and synthetic deposits by using formula:
Last phase is to create SWAP curve by applying Synthetic deposits and OTC FRA rates by using discount calculation method.
Here light blue curve shows why this complex curve building matters and should be used in all valuations, if available.
Fully implemented curves