Hi,I wanted to know if it is ok to use futures in curve construction along with depos/swap rates (i am talking about uncollateralized swaps here). I ask because the credit risk of futures is lower as compared to swaps and deposits. so wouldn't that lead to inconsistencies? The other option is to use FRAs, but they may not be as liquid.Apologies if this has already been asked before. If it is, it would be great if you could provide me a link of the relevant thread here. Thanks.

Everyone uses futures...

Thanks for answering. I know that. But doesn't this violate the consistency principle that your instruments should have similar level of creditworthiness?Also, wouldn't this also violate thr forward rate estimation formulawhich assumes similar level of credit risk?

QuoteOriginally posted by: atulnahar21Thanks for answering. I know that. But doesn't this violate the consistency principle that your instruments should have similar level of creditworthiness?Also, wouldn't this also violate thr forward rate estimation formulawhich assumes similar level of credit risk?Well, maybe if you're using futures and uncollateralized swaps, there could be, as you say, a violation... However, like with many things in life, you need to decide what you're after. In this case you have a choice between building a reasonable and up-to-date curve and building a consistent curve. It appears, based on your description, that you can't have both...Moreover, I confess that I don't entirely understand the setting. Are you suggesting that you have liquid, live market quotes for uncollateralized swaps? 'Cause, obviously, these rates would have to be specific to you as the counterparty...At any rate, what I would propose to you is that you build a regular simple vanilla curve using the widely accepted methodology with widely accepted inputs. Once you have that, you can decide how to deal with the uncollateralized nature of your swaps, if you so desire.

There is a difference between the creditworthiness of an instrument and the creditworthiness of the index against which the instrument derives its price. As long as all of the calibrating instruments price against the same index, you should be OK. It's mixing instruments that derive their cashflows from different indices that cause problems.