Abstract
In this paper we discuss interest rate curve interpolation methods and their properties in the context of financial applications. We review the modern (multi-curve) theory of interest rate curve modeling, taking into account collateralization. Building on this solid foundation we reconsider several curve interpolation methods and derive some modifications thereof. We revise well-known criteria for the goodness of interpolation and introduce the hedge error, arising from dynamic delta-hedging over an extended period, as enhanced evaluation parameter. This new criterion reflects both a practical and meaningful choice since hedging is the essential instrument applied by banks to mitigate interest rate risks. The hedge error particularly represents the amount of money at risk. Numerical results in a multi-curve financial framework are derived by means of a Java-based implementation performed on actual market data.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
