OIS Discounting - Curve Bootstrapping - Part 1: The Theory

🎬 In this video, learn the theory behind the construction of an OIS Discounting Curve using the bootstrapping methodology Have you ever wondered about how yield curves and discount factor curves are constructed from quoted instruments? Have you always wondered what bootstrapping really meant? This video will show you just that: from the very general concepts to the detailed mathematical formulas and the numerical tools (e.g. interpolation & root-finding algorithms) necessary to build such curves. Along with the theory, we will include a complete and self-contained example in an Excel spreadsheet, replicating exactly what is happening in the C++ code of ORE. Please note this spreadsheet should be made available in the coming weeks as part of a new repository completely dedicated to ORE-Related Tools - Please subscribe to get notifications. The underlying instrument driving all these calculations is an equity option which data can already be found in ORE repository: https://github.com/OpenSourceRisk/Eng... The spreadsheet used as support in the second part of the video can be found in the ORE Tools repository: https://github.com/OpenSourceRisk/Too... We will split the video into 2 videos: this video is about the theory Chapter 1 - We will first present the general principles of bootstrapping, what it is, why it’s so important, the different types, the choice of instruments… Chapter 2 - Then we demonstrate some of the mathematical formulas used for OIS curve bootstrapping Then the second video will be the practice part: Chapter 3 - We will show you an example in Excel which is actually a complete parallel implementation of the bootstrapping calculations happening in ORE. It means that everything which is presented in the Excel spreadsheet will have a corresponding implementation in C++, with the exact same data and the exact same results The spreadsheet can be found on our Tools repository: https://github.com/OpenSourceRisk/Too... Reference: TA004 Category: Trades & Analytics Complexity: Beginner Operating System: Windows Link(s) to Supporting Document(s): ORE Repository: https://github.com/OpenSourceRisk ORE Website: https://www.opensourcerisk.org/ Author(s): Alexis David Speaker(s): Alexis David Editor(s): Alexis David Prerequisite(s): TA001 - Equity Option with Implied Volatility Surface:    • How to price an Equity Option with Implied...   FC003 - How to Change the Reporting Currency:    • How to Change the Collateralization Curren...   Chapters & Key Moments of the video: 00:00 - Introduction Chapter 1 - General Principles 02:08 - 1.a. Swap vs Bond Market 04:22 - 1.b. OIS Introduction 07:10 - 1.c. Bootstrapping High-Level Principles Chapter 2 - Bootstrapping Theory 09:37 - 2.a. Interest Rate Types 12:00 - 2.b. Schedule Definition 17:18 - 2.c. Instrument Definition - Deposit Explanation 19:23 - 2.c. Instrument Definition - General Fixed-Floating Swap 21:49 - 2.c. Instrument Definition - OIS Floating Rate Introduction 24:42 - 2.c. Instrument Definition - Current Bootstrapping Case (first part) 26:27 - 2.c. Instrument Definition - OIS Explanation 28:53 - 2.c. Instrument Definition - Current Bootstrapping Case (second part) 29:52 - 2.c. Instrument Definition - Cashflow Schedule Examples 32:26 - 2.d. Boostrapping Explanation - OIS Floating Rate - Calculations Summary (first part) 33:09 - 2.d. Boostrapping Explanation - OIS Compounding Rate - Alternative Equations 36:40 - 2.d. Boostrapping Explanation - OIS Floating Rate - Calculations Summary (second part) 37:05 - 2.d. Boostrapping Explanation - OIS Floating Leg Calculation 38:00 - 2.d. Boostrapping Explanation - Analytical Case 39:18 - 2.d. Boostrapping Explanation - Root-Finding Case (first part) 42:36 - 2.d. Boostrapping Explanation - Log-Linear Interpolation 45:19 - 2.d. Boostrapping Explanation - Root-Finding Case (second part) 46:51 - 2.d. Boostrapping Explanation - Z-Spread Curve 47:57 - 2.d. Boostrapping Explanation - Next Steps Example 49:03 - Outro #bootstrapping #discounting #yieldcurve #zerocouponcurve #curveconstruction #overnightindexswap #equityoption #exceltutorial #excel #cplusplus #cplusplustutorial #cplusplusprogramming