Marc Henrard - Multi-curve framework

Last week-end I visited the Science Museum in London, and more precisely the Information Age new exhibition. One of the displays describes the invention of the “WWW” at the CERN in the early 90s. One of the dates that attracted my attention in the panel was the date of the first WWW conference: May 1994. The conference's site is still working! This reminded me that I was an early web “designer” (you can decide what the inverted commas mean for yourself once you have seen the result). I was surprised to see that some of my early “pieces of art” are still alive, for example: http://www.ulb.ac.be/assoc/bms/bbms.html An almost empty and obsolete since 10 years page, but still a piece of www archeology. I don’t remember when I designed the Belgian Mathematical Society first web site, but it was obviously before the 16 February 1996 . That was almost 20 years ago and less than 2 years into the www history. What I remember from the design is that the it was done by manually typin...

In the book, I indicated why I dislike the term “OIS discounting” (OIS = Overnight Indexed Swap) as it hides the complexity of the valuation process and the numerous hypothesis and results required to achieve the valuation formula. The correctness of the approach depends on a number of market conventions and practice, unstable to my opinion. Unstable in the physical sense, that a small perturbation to the situation can destroy the whole process, not only move it slightly. This blog entry is written in reaction of the Risk article titled OIS rate change easy to absorb, says ISDAs O'Connor (subscription required). As you can guess from the introduction, I disagree with the “easy” part of the title and I believe the term “OIS” used in the title is as misleading as the one used in “OIS discounting”. If I understand correctly the article, there is a General Collateral (GC) overnight index and some suggestion, in particular by the US Federal Reserve, to change the standard index fro...

Episode 2: Zero rate collateral There is certainly a push for more standardisation of financial products and their collateral terms – Credit Support Annexe (CSA) and margining process in particular. One particular discussion is around the CSA collateral remuneration and its equivalent Price Alignment Interest (PAI) used by Central Counterparts (CCPs). In the current standard terms an overnight rate (Fed Fund, EONIA, etc.) is paid in the currency of the trade in most cases. One potential solution to simplify the term of the CSAs, that I propose as my next fiction, would be to pay interest at a rate of 0 on the collateral. This would certainly simplify the computation of the interest part of any variation margin. This proposal would align collateral and CCP process to the margin process used for exchange-traded futures. The amount paid as variation margin on futures, on OTC and on cleared trades would not include any interest any more and would be in line. As a secondary benefit, th...

In one of my recent blogs , I proposed the first episode of a series in Finance Fiction. The blog presented packs and bundles options as an addition to the interest rate exchange-traded offering; it was based on ideas initially proposed in early 2013 in a paper on STIR futures and presented in Section 7.8.6 “Ceci nest pas une option” of the book. It turns out that either someone read the paper and the blog and took it for reality or the ideas proposed were not so fictional. CME has announced it will start offering bundle futures (1) and bundle futures options from September 2014. I’m not an expert in legal matters: Can an author claim copyright on reality when reality copies the author’s fiction? The quote I used in the original paper on the subject (and in the book) was Messieurs les Anglais, tirez les premiers ! Attributed by Voltaire to the (French) Comte d'Auteroche at the battle of Fontenoy, 1745 and I continued with The XXIst century corporate warfare is prob...

Finance fiction After numerous conferences on the impact of regulation and the new market structure on quantitative finance, it’s time to start thinking about the impact the quants can have on regulation and the market structure. The book not only covers theoretical considerations about the foundations of a multi-curve framework, and practical considerations about liquid instruments, it also contains directly or indirectly some "finance fiction" episodes where non-existent instruments or practices are described. The reason to introduce such fictions in a non-fiction book is that the market is changing and is largely incomplete . Instruments that were completely redundant in the past are now becoming nice-to-haves or even must-haves . Changes in regulatory treatment, movement to futurization, generalisation of collateral and margining practices have created a moving ground. The financial landscape is moving; I try to guess some of the potential new characters. After...

Since 2007, a new framework has become the standard for interest rate derivative pricing: the multi-curve framework (also called multiple curve). Another market reality has gained more importance: the collateralization of interbank trades. Even if the frameworks for multi-curves and collateral are nowadays relatively standard, their details and the far-reaching impacts of seemingly small changes are not always fully understood. Over the past few years, I've written several papers on these frameworks and published a book . I have also been one of the architects of a very flexible and efficient open source implementation of those frameworks. It can be found at http://strata.opengamma.io/ Writing technical papers and the code is not an end in itself, as people not only want to know the minutia of the associated mathematics and read the detailed code, but they also want to see the big picture, how it is used in practice, see examples in spreadsheet format, understand what are the i...

The multi-curve framework book is now the #1 Amazon bestseller category Business, Finance & Law > Professional Finance > Interest

Golf is multi-curve : draw, fade, breaking puts, good and bad bounces, back spin, slice, hook, etc. As a lot of you know, I'm a keen golfer. When I'm not dreaming the solution to all problems about multi-curve (see page xii of the book for more on that), I'm dreaming about birdies (eagles will be for next year :) ). I have ordered some swag golf balls with the book title as logo (see picture below). Obviously those balls are for grab. If you are a reader of the multi-curve book, want to play a round of golf, just let me know. I will be happy to offer a multi-curve ball (Pro V1x - 2014) to any reader I meet on the tee. When I'm not writing or coding about the multi-curve framework, I can be found on different courses around London and Brussels; I will be glad to discover new ones. Don't hesitate to challenge me for a round. Golf balls with Multi-curve Framework logo resting on a Multi-curve Framework book.

This is an important and much needed book looking at multiple interest rate curves, including collateralization. The subject is introduced motivating all developments from a historical perspective and is very pleasant to read. Both a rigorous theoretical approach and detailed practical recipes for bootstrapping and interpolation techniques are provided, in a coordinated fashion, using real market products. Advanced discussion of multiple curve dynamics, with specific modeling choices, is also given in the final part. From one of the originators and protagonists of the recent multiple curves literature, this is an appealing book for a potentially wide audience and is strongly recommended. Prof Damiano Brigo Dept of Mathematics, Imperial College London, and Director of the Capco institute, and Dr Andrea Pallavicini Imperial College London and Head of Equity, Fx and Commodities models, Banca IMI

As you have seen on the book's cover, Professor Chyng Wen Tee (Assistant Professor of Quantitative Finance, Singapore Management University) was kind enough to endorse the book. The endorsement printed on the back cover was not the full original text of the endorsement; the original endorsement was longer and would not have fit on the back cover. The full original text: As a quantitative finance practitioner-turned-academic, I read Dr. Henrard's Interest Rate Modelling in the Multi-curve Framework with great interest and excitement. Seven years after the onset of the infamous financial crisis that started in 2007, credible reference textbooks refurbishing our approach to interest rate modelling remain sparse, leading to a dichotomous gap between the interest rate models taught in a university and the interest rate models applied in practice. In the academic world, all too often the teaching of important concepts about time value of money, discounting and forwarding beco...

As you have seen on the book's cover, Professor Stéphane Crépey (Head of Probability and Mathematical Finance, University of Every, France) was kind enough to endorse the book. The endorsement printed on the back cover was not the full original text of the endorsement; it was a little bit longer and contained some comments to start a dialogue or debate on some philosophical questions about the multi-curve framework. The full original text: With his two seminal ''irony'' papers, Marc Henrard is one of the very first to have identified (and in fact, anticipated) the importance of the interest rate multi-curve tsunami that came in the aftermath of the global financial crisis. Quite logically, this is also the focus of his book, one of the very few of its kind. Indeed, "competitors" typically also (and mainly) deal with CVA, FVA and the likes, so that there is usually not much space left for the multi-curve issue per se. By contrast, Marc addresses the...

The picture used as background for this blog is also the one used on the book's cover. It may look like a set of greenish color bands, but it is more than that. The picture used on the cover is not the most important part of the book (if it is for you, maybe I have missed my goal writing the book). Nevertheless there is a small story behind it and I though it was worth sharing it. The initial book jacket proposal from the editor was not really to my taste. At the time the editor didn't want to change the collection cover. I made a couple of suggestions to change the small color square on the original design using some of the pictures in my personal library. A couple of weeks before the publication date for the book, to my surprise (and joy), the editor decided to change completely the design for the entire collection. For my book, which is the first with the new design, he used one of the pictures I had suggested, the one you can see on the blog background. The picture is sim...

A sample chapter, the table of content and the index of the book are now available on the Palgrave website. The sample chapter is the long introduction (10 pages); it is an introduction to the book but also to the history of the multi-curve framework. The book page on Palgrave site is: http://www.palgrave.com/products/title.aspx?pid=707837 The sample chapter can be found at: http://www.palgrave.com/resources/sample-chapters/9781137374653_sample.pdf

The first lines of the book were written in 2006. At the time the term multi-curve framework , which is used for the book's title, had not been coined and my idea was only to write a couple of pages for a note. In the mean time, August 2007 changed the course of writing on interest rate curve modelling for ever. Festina lente. Latin saying Personal translation: Haste slowly. The starting point of the reflection was my quest to answer the question `` What is the present value of a FRA? '' in a way that convinces me. The initial intend was a personal quest to understand the foundation of a fundamental, and in appearance simple, quantitative finance question. I could not find an answer in the literature satisfactory to me. The answers I could find were either `` it is trivial '', i.e. `` don't ask silly questions '', either a description of a replication argument for which it was not acceptable to discuss the numerous hidden hypothesis. Discussing th...

Advance copies of my new book "Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation" just arrived from the printer. Copies will be available at the Bachelier World Congress in Brussels (2-5 June, 2014). More information will be posted in the coming days. Any author will tell you that writing a book is a wonderful journey. Actually no, the wonderful journey was to dream it! Chacun sa méthode... Moi, je travaille en dormant et la solution de tous les problèmes, je la trouve en rêvant. Drôle de drame (1937) - Marcel Carné Personal translation: Each his own method . . . Myself, I work sleeping and the solution to all problems, I find it dreaming.