May 30th, 2012, 6:47 am
QuoteOriginally posted by: deepdish7QuoteOriginally posted by: pimpelQuoteOriginally posted by: deepdish7QuoteOriginally posted by: pimpelProjection curves are stripped from IR futures and IRS rates assuming discounting with OIS. The way you strip forwards is to make sure, that your IRS value dealt at market rate is nil.this is what I would imagine in the first place (or using FRAs for projecting as alternative to IR futures and swaps) but I was told that projection curve will be based on overnight index swaps (which doesn't make any sense to me). i checked two times and was told same. maybe people in the bank are just mixing things up in the transition process. will recheckI would expect the projection curve being set up as OIS curve plus basis spread. Maybe that was what they meant. In order to make life more practical I heard that the most comfortable option is to define most liquid projection curve as rates, since that is what you trade and hedge with, and OIS (discounting curve) is defined as the projection curve less the spread, since it has smaller impact on values.To define projection curve as rates - you mean as FRA/IR Futures/Swaps? But are they really more liquid than OIS? And isn't it better to have a single benchmark curve (OIS) rather than several rates curves which you must somehow choose between? And how would you define the spread to arrive from FRA/IR Futures/Swaps to OIS then? I'm hearing that OIS will be used as a base curve in our firm, as it's the most liquid curve..I am not a market expert and never did a single trade, but to my knowledge, IR futures are the most liquid instruments on this planet, that is why I would set up projection curve based on those rates, and all the other curves as spread to this curve to omit problems arising from interpolation algorithms shown in "Two curves, one price". The fact you use OIS rates in bootstrapping the discount curve, does not mean, that you can not set it up later as a spread to projection curve in your system.