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Hedge curves

Last modified by Nikita Kapchenko on 2019/09/26 16:08

Intro:

The curves are build from many market instruments: deposits, FRA, swaps -> curve calibration basket

As a trader you don't want to hedge your IRD products on all of them but only on some of them -> product hedging basket

So as a trader you want to compute your DV01 only for products you use for hedging.

Implementation:

  1. Build main curve on market instruments -> main curve
  2. Price your product -> Price(main curve)
  3. Build hedge curve only on hedging basket -> hedge curve
  4. Deduce the curve spreads from: Price (main curve) = Price(hedge curve + spread) -> hedge spreads
  5. So by definition you can rewrite: main curve = hedge curve + [main curve - hedge curve]
  6. Now, while computing your DV01 you shift only hedge curve keeping [normal curve - hedge curve] spread constant.

Following this approach, you are always inline with market npv but you get the pure DV01 exposure to the products you use for hedging.