Title: Multi-curve interest rate modelling and inflation-linked pricing
Authors: Henrik Dam - University of Copenhagen (Denmark)
Obeid Mahomed - University of Cape Town (South Africa)
David Skovmand - University of Copenhagen (Denmark)
Andrea Macrina - University College London (United Kingdom) [presenting]
Abstract: The valuation and management of risk exposures often leads to the question of how to model spreads. Multi-curve discounting, for instance, relies on modelling the risk exposures manifested in the spreads between the curves linked to the tenors of interbank offer rates and an overnight index swap rate. Another example is inflation-linked pricing and hedging where one of the main ingredients is a model for the consumer price index, which we view as a spread between the nominal and the real value of goods and services. The list of examples may also include credit and foreign exchange, and certain aspects relevant to asset valuation in emerging markets also appear to pose questions revolving around spread modelling. We consider stochastic models for interest rates and inflation-linked pricing, which share in common an approach that offers good malleability and facilitates financial understanding while keeping mathematical complexity low.