The Past, Present and Future of Curves

44 Pages Posted: 19 Aug 2013

See all articles by Mark Gibbs

Mark Gibbs

Gibbs Consulting

Russell Goyder

FINCAD Corporation

Date Written: October 29, 2012


Reading about OIS discounting in the financial press in recent months, it is hard to avoid the following impression: interest rate modeling for vanilla instruments was simple and well understood before the credit crisis of 2008; since the crisis, everything needs to be rethought from first principles, resulting in a paradigm shift in how swaps and other vanilla interest rate instruments are valued and how curves are built, and; institutions around the globe are scrambling to update legacy valuation and risk management systems to cope with this modeling revolution.

This position is only reinforced by an examination of recent press releases in the analytics vendor space, which proudly announce the advent of “dual curve” bootstrapping capabilities and list asset classes that can now be priced with the new approach, after a new software release.

In general, this is not a bad approximation of reality. Many institutions around the world are indeed expending considerable effort to update legacy systems to cope with the post-crisis market. Many market participants are indeed having to throw out their existing understanding of how vanilla rates derivatives are priced and learn a more sophisticated approach. But the notion that these ideas and techniques themselves are new, dating to the aftermath of the 2008 credit crisis, is false.

In fact, several market participants have taken the change comfortably in their stride, requiring only minimal modification of their conceptual and software frameworks to cope with OIS discounting and related effects. A truer characterization of the credit crisis’ effect is one of popularizing this knowledge, hitherto confined to sophisticated trading operations only.

In this article, after a brief description of the curve-building problem (Sec. 2), we give a brief history of the development of the ideas that now form the basis of modern curve-building (Sec. 3). In doing so, we identify the key concepts and abstractions that are present in the problem, which in turn form the basis of any generic curve-building system (Sec. 4). We finish the article with two examples of building curves in F3, an analytics platform whose architecture predates the credit crisis, but which has required no changes to keep pace with the recent “revolution” in interest rate modeling. Our conclusion is given in Sec. 7.

Suggested Citation

Gibbs, Mark and Goyder, Russell, The Past, Present and Future of Curves (October 29, 2012). Available at SSRN: or

Mark Gibbs

Gibbs Consulting ( email )

PO Box 244
Cobble Hill, British Columbia V0R 1L0


Russell Goyder (Contact Author)

FINCAD Corporation ( email )

Central City, Suite 1750
13450 102nd Ave
Surrey, British Columbia V3T 5X3


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