Download this Paper Open PDF in Browser

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

75 Pages Posted: 21 Feb 2010 Last revised: 23 Mar 2010

Masaaki Fujii

University of Tokyo - Faculty of Economics

Yasufumi Shimada

Shinsei Bank, Ltd

Akihiko Takahashi

University of Tokyo - Faculty of Economics

Date Written: 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.

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

JEL Classification: E43,G13

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: https://ssrn.com/abstract=1556487 or http://dx.doi.org/10.2139/ssrn.1556487

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 - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Paper statistics

Downloads
1,570
Rank
8,494
Abstract Views
4,678