Forward Curves

An overview of forward curves, their construction using market data and bootstrapping, and their key applications in financial modeling and risk management.

What Are Forward Curves?

Forward curves represent expected interest rates at different points in the future. They’re widely used in:

• Debt Structuring: To forecast borrowing costs.

• Swap Pricing: To calculate future cashflows in interest rate swaps.

• Risk Management: To assess exposure to interest rate changes.

---

How We Calculate Forward Curves

1. Data Sources

We source high-quality data from trusted providers who collect information via:

• Brokers: Real-time trade data and pricing.

• Electronic Trading Platforms: Market activity snapshots.

• Direct Market Participants: Insights from banks, hedge funds, and institutions.

The curves are built using data from:

• Swap Rates: Fixed rates in swap agreements.

• FRAs (Forward Rate Agreements): Agreed interest rates for future dates.

• Futures Contracts: Market expectations for asset prices.

• Fixings: Benchmark daily rates like EURIBOR.

---

2. Bootstrapping Methodology

We use the bootstrapping process to construct forward curves. This iterative approach builds the curve step-by-step, starting with short-term rates and extending to longer-term maturities. By solving for the future rates that ensure current financial instruments are fairly priced, bootstrapping ensures the forward curve reflects real market data and expectations.

---