[R-sig-finance] fBonds svensson fitting

[Krishna Kumar]

Thomas Steiner wrote:

>  
>
>>r = nlm(f=nelson,p=c(1,10,10,10),y=fwdcrv,steptol=1e-10,iterlim=500)
>>    
>>
>
>  
>
 >>How do you calculate forward rates out of SWAP (Libor) rates?

Typically you have money-market/cash , futures and swap rates so it is a 
little more involved and there are other considerations
such as smoothness of the forward and day counts etc. If you want an 
ugly way of doing this (caveat emptor)

Let us say we have the swap crv object with the first row being a cash 
rate (1 year) rate. The columns are
 tenor in years, day count between two tenor points and the swap/cash rates.

 > swapcrv
   Tenor days.360  Rates
1      1 1.022222 0.0359
2      2 1.011111 0.0390
3      3 1.011111 0.0403
4      4 1.013889 0.0409
5      5 1.016667 0.0414
6      6 1.013889 0.0418
7      7 1.019444 0.0423
8      8 1.011111 0.0427
9      9 1.013889 0.0430
10    10 1.013889 0.0434


---------------------------------------------
dfcurve<-function(swapcrv)
{
#First construct a discount curve!
##assumes the first point is cash and rest are swap rates
n<-dim(swapcrv)[1]
dfcrv<-matrix(0,n,2)
dfcrv[,1]<-swapcrv[,1]
dfcrv[,2]<-1/(1+swapcrv[,2]*swapcrv[,3])
dfcrv[-1,2]<-dfcrv[-1,2]*(1-(cumsum(swapcrv[-n,2]*dfcrv[-n,2]))*swapcrv[-1,3])
return(dfcrv)
}


df.to.fwd<-function(dfcurve,tenor,interp="linear")
{
#function to compute the forward curve at the tenor points given a dfcurve!
#do linear interpolation of the dfactors or cubic spline from akima package!
tenor<-c(0,tenor)
n<-length(tenor)
fwd.tenor<-array(0,n)
df.tenor<-array(0,n)
if(interp=="spline")
{
df.tenor<-aspline(dfcurve[,1],dfcurve[,2],tenor)$y

} else
{
df.tenor<-approx(dfcurve[,1],dfcurve[,2],tenor)$y

}
df.tenor[1]<-1
fwd.tenor<-(df.tenor[-n]/df.tenor[-1] -1)/diff(tenor)
return(list(fwd=fwd.tenor,df=df.tenor))

}
-----------------------------------------------


So now you can do

 >   dfcrv <- dfcurve(swapcrv)

And then construct the forward curve from the discount curve.

 > df.to.fwd(dfcrv,tenor=seq(0.5,10,by=0.5),interp="spline")

There are many ways to construct these curves and you will find this 
exhaustive paper useful
(http://www.cam.wits.ac.za/mfinance/papers/interpolation.pdf )

Best,
Kris