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http://ssrn.com/abstract=1556487
 
 

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On the Term Structure of Interest Rates with Basis Spreads, Collateral and Multiple Currencies


Masaaki Fujii


University of Tokyo - Faculty of Economics

Yasufumi Shimada


Shinsei Bank, Ltd

Akihiko Takahashi


University of Tokyo - Graduate School of Economics

February 18, 2010


Abstract:     
The recent financial crisis caused dramatic widening and elevated volatilities among basis spreads in cross currency as well as domestic interest rate markets. Furthermore, the widespread use of collateral has made the effective funding cost of financial institutions for the trades significantly different from the Libor of the corresponding payment currency. In this presentation, after reviewing the implications of profit/loss for financial firms still using a textbook-style curve construction and an interest rate model, we will explain the consistent swap curve construction with all the basis spreads taken into account, and how to make all the reference rates stochastic with no-arbitrage conditions.

Number of Pages in PDF File: 75

Keywords: Libor, Swap, Tenor, Yield Curve, Collateral, Overnight Index Swap, Cross Currency, Basis Spread, Market Model, HJM

JEL Classification: E43,G13

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Date posted: February 21, 2010 ; Last revised: March 23, 2010

Suggested Citation

Fujii, Masaaki and Shimada, Yasufumi and Takahashi, Akihiko, On the Term Structure of Interest Rates with Basis Spreads, Collateral and Multiple Currencies (February 18, 2010). Available at SSRN: http://ssrn.com/abstract=1556487 or http://dx.doi.org/10.2139/ssrn.1556487

Contact Information

Masaaki Fujii (Contact Author)
University of Tokyo - Faculty of Economics ( email )
7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan
Yasufumi Shimada
Shinsei Bank, Ltd ( email )
Chiyoda, Tokyo
Japan
Akihiko Takahashi
University of Tokyo - Graduate School of Economics ( email )
Tokyo
Japan
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