We have recently started the project of including the multi-curve framework into the UDFinLib, our own financial library. The topic is delicate, as it consists of both research and implementation at once.
After the 2007-2008 world financial crisis it became clear that the classical single-curve framework that had been used until then was not appropriate to value products and to hedge portfolio's positions. All of a sudden credit risk was an every day's topic, collateral margins exploded and the previously small spreads between different-tenor swaps (OIS vs Libor, 3M-tenor vs 6M-tenor) could not be neglected anymore. Single-curve building, which treated instrument with different tenors in the same way, had to be upgraded to multi-curve.
In a nutshell, the multi-curve framework amounts to construct one discount curve and many tenor curves. The discount curve is typically built with OIS instruments, which are the best approximation for the risk free rate. All the other tenor curve are built with instruments with homogeneous tenors. The most used tenors are 3M, 6M, 9M, 12M. Typically, the longer the tenor the riskier the trade and hence the higher the corresponding rate.
In this blog we give a non-exhaustive list of references that helped us in both understanding the multi-curve and designing the process.
- Everything You Always Wanted to Know About Multiple Interest Rate Curve Bootstrapping But Were Afraid To Ask, by Ametrano-Bianchetti
- The Multi-Curve Potential Model, by Nguyen-Seifried
- Curves and Term Structure Models: Definition, Calibration and Application of Rate Curves and Term Structure Market Models, by Fries
- Two Curves, One Price: Pricing & Hedging Interest Rate Derivatives Decoupling Forwarding and Discounting Yield Curves, by Bianchetti
- Interest Rates After The Credit Crunch: Multiple-Curve Vanilla Derivatives and SABR, by Bianchetti-Carlicchi
- Interest Rate Modelling in the Multi-curve Framework, by Henrard
- C# for Financial Markets, by Duffy-Germani (chapter on multi-curve)