Yield curve is nothing but a set of interest rates across different durations for example 1 week, 1 month, 2 months, 1 Year, etc. When you plot these rates on the Y Axis and with Term durations on X Axis, the graph takes the shape of a curve showing yields. This curve gives a relation between interest rate and the time for which the money is being deposited. This time duration is also known as term. In UK for example, LIBOR rate is considered to be the benchmark yield curve. This is the average rate at which banks in London lend to one another
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OFSAA allows us to define as many yield curves that we desire.The OFSAA’s cash flow engine can use the yield curve term rates to reprice the interest rates sensitive financial instruments.
The changes to the interest rates in yield curves can also trigger the repricing of financial instruments. For example if the Adjustable type Code Flag in instrument table contains a value of 30 or 50 and if the Reprice Frequency is greater than 0, then the reprice dates are driven by forecasted yield curve rate changes rather than by the reprice frequency.
The interest rate variance also allows OFSAA to perform stress testing because a bank will usually always have both the borrowings and the lendings, which are sensitive to the interest rate changes. For stress testing new yield curves can be defined in OFSAA.
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Next, you define the terms, i.e. the bands for which the interest rates are applicable.
And then we can define the rates for these terms, as of an effective date. For exampe, the GBP Libor can keep changing every single day. The entries into these screens are usually automated via the interface feeds.
Subscribe to this comment's feedwritten by imran khan26 , October 18, 2012
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a large European bank might consolidate its holdings in Asian currencies to the Japanese yen (reporting currency) and its balances Am
Sometimes following your heart means breaking someone else's.