Rate curves more tips

Rate curves how often did you get the dreaded message: Could not compute mid rates for curve XXX. As rate curves are so important, you can expect that everything else fails: pricing, simulation, some other market data calibration, accounting, etc… In a nutshell, you need to fix that rate curve problem ASAP!

When a curve fails to calibrate there could be different issues: one instrument in the curve is not sensitive to the curve, instruments have a price of 0 and 0 is not an accepted rate, your curve relationship is so complex that you cannot reach a solution within 30 iterations.

Whenever a curve is not calibrating, it is important to open the instruments in the rate curve and check that you get properly 0 NPV for all of them. You cannot do it for Futures (or contango or Fx swaps), so you’ll have to assume that they work. If you get an instrument with a non 0 NPV, then either you found the culprit or you have an arbitrageable curve. In the later case, if you were not doing something completely crazy, that’s a defect as curves are basically solved so that all instruments have a 0 NPV.

When you found the instrument(s) you should have a look at it and wonder how should it be sensitive to the curve that currently fails calibrating: discounting? Estimation? If estimation, you can go to rate details on the flow screens and check that you properly see the curve name. If for discounting, you can check in the pricing the assigned curve and also the solved value in the discounted flows. Usually it is quite clear to see which one fails.

Once you found it, go to the rate curve assignment and assign that instrument for discounting or estimation onto the curve. 95% of the time that fixes the issue. And if the calibration fails in production (assuming it was working before), I’d do pretty much the same except that I would first check the market rates fed in (in case you have something with very incorrect values).

The problem of rate curves not calibrating gets tougher when you have multiple rate curves calibrating at once. We already posted on such structure previously and I have to say I rarely saw any calibration issue when the system was used correctly. I have to say that when you’re trying some advanced curve relationship, first of all, inform Murex as you will need their help; secondary you can expect some calibration failure. But again zooming on the instrument and checking estimation and discounting is always the basic thing to do.

One thing you have to be wary of is when the instrument you use is sensitive to the curve only by its indexation. I had some hit and miss (more hits in the recent versions) but when you get to that point it is more workarounds for matching an existing rate building process rather than a financial reason for doing.

If you have tips, info or question, feel free to ask below!