• How does ActiveMargin™ determine the yield curve? |
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ActiveMargin™ can generate zero yield curves using one of the two methods
- Bootstrapping of zero curve from observed prices
- Direct estimation of zero curve parameters through maximizing likelihood of price errors
ActiveMargin™ can use observed prices of the following instruments to generate the zero curve using any of the above methods
- T-Bills
- T-Bill futures
- Interest Strips
- Forward Rate Agreement quotes and Swap rates
When bootstrapped, the resulting zero rates are smoothed using any of the following methods
- Smoothing Spline
- Nelson-Siegel Curve
- Bradley-Crane Curve
Under direct parameter estimation, ActiveMargin™ currently supports estimation of Nelson-Siegel parameters through maximum likelihood estimation. 
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| • When bootstrapped, how does ActiveMargin™ ensure that the final zero yield and forward curves are smooth? |
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The smoothed zero curve resulting from either of the two methods ensures that the forward curve and the discount curves are smooth and differentiable. While ActiveMargin™ will automatically fit the best possible curve, it provides for users to change the smoothing factor to arrive at different fits to the term structure. Click here to view yield curves
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| • When there is an overlap in maturities for different instrument types, can the user specify an order of precedence? |
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Yes. During bootstrapping, the user has the option of specifying a priority to each of these instruments in the actual determination of the yield curve at various maturities. For instance, the user could create time horizons like Short term (< 6 months), Medium term and Long term (> 3 years). He can then specify that to determine the yield curve in the short term, ActiveMargin™ has to use the following instruments in the following order of priority :
- T-Bills
- T-Bill futures
- Strips
In the case of overlap, rates from the instrument type with the higher priority would be considered. This priority can be set separately for each currency and credit quality.
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| • Can there be multiple yield curves for a given currency? |
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Yes. ActiveMargin™ allows multiple yield curves to be defined for a currency. For risk computations, ActiveMargin™ uses that yield curve that relates to the credit quality of the instrument being valued.
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