SPV October 2011 - Estimation of fixing rate curves

The subject of the theme is to examine estimation methods and use of more than one yield curve when valuating floating rate assets. Since the beginning of the debt crisis in 2008, a new standard for valuation of floating rate assets has emerged. The first step is to find the curve to be used for discounting future payments and secondly a curve for modeling future payments based on e.g. EURIBOR3M or EURIBOR6M is chosen. The first curve is called the discount curve, the funding curve or the pricing curve. The second curve is called the fixing curve and it is tailored to the tenor of the underlying fixing asset, e.g. 3 or 6 month. We investigate different methods for estimating these curves and subsequently use them in a pricing example, showing the importance of the yield curve choice.