182 Frequently Asked Questions In Quantitative Finance
Because of the relative liquidity of the instruments it
is common to use deposit rates in the very short term,
bonds and FRAs for the medium term and swaps for
longer end of the forward curve.
Finally, because the bootstrapped forward curve is
assumed to come from deterministic rates it is danger-
ous to use it to price instruments with convexity since
such instruments require a model for randomness, as
explained byJensen’s Inequality.
References and Further Reading
Hagan, P & West, G Interpolation methods for curve con-
struction. http://www.riskworx.com/insights/interpolation/
interpolation.pdf
Jones, J 1995 private communication
Ron, U 2000 A practical guide to swap curve construction.
Technical Report 17, Bank of Canada
Walsh, O 2003 The art and science of curve building.Wilmott
magazine November 8–10
