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Cash and Deposit Rates in Short-End Yield Curve Construction

Article Quant Q&A · Author: Henry Wu Hu
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Summary

The document distinguishes the broad category of cash instruments from deposit rates used to calibrate a yield curve. Cash can refer to several short-term instruments, including deposits, Treasury bills, commercial paper, and repos; their yields differ, so curve construction depends on which instrument is selected for the short end.

It also describes a desk convention in which “cash” and “depo” rates refer to curve inputs that control expected future floating rates, while a published benchmark fixing is tracked separately once it becomes available. The example follows a swap quote before and after a fixing is released, then after a policy-rate change: the curve input can be revised to reflect expectations for future fixings without replacing the already published fixing. Terminology varies across desks and curve setups, so the distinction is contextual rather than universal.

Key ideas

  • Cash is a broad label for short-term instruments with potentially different yields.
  • A yield curve’s short end is calibrated to a selected cash instrument.
  • Some desks use cash and deposit rates interchangeably for curve inputs.
  • A curve input for expected future floating rates can differ from a published benchmark fixing.

Tags

Fixed incomeDerivatives pricing
Full text
# Cash vs Deposit Rates


# Cash vs Deposit Rates












When constructing a yield curve for derivatives purposes, what is the difference between cash and deposits rates?

## Answer by Daneel Olivaw (score 2)

https://quant.stackexchange.com/a/44167

My impression is that cash is a more generic term: deposits are a cash security, but so are US Treasury bills, commercial paper, repos, and so on, and each security has different yields. When you construct a yield curve, the short end is calibrated to a certain cash security.

## Answer by Attack68 (score 1)

https://quant.stackexchange.com/a/44170

When constructing a yield curve of, for example IBOR rates, there is often a misunderstanding between floating rates (or the input to the curve that can control the floating rates) and the published IBOR rates, which impact the pricing of Interest Rate Swap derivatives. The nomenclature of these can change but on my desk we called them "deposit rates" or "cash rates" for those that controlled the floating LIBOR rates and "LIBOR rates" for the actual day's published fixings. On our desk "cash" and "depo" rates were the same thing.

Let me give you an example:

Its 9am and you are pricing a spot-2Y 6M-LIBOR Interest Rate Swap. You don't know what the 6M LIBOR fixing for the day is yet so you have a guess, say 1%, and you set both your 6M deposit rate input and your 6M LIBOR rate to 1%. Then you price the swap as usual.

Shortly passed 11am the LIBOR fixing is released at 1.005%, you consider this a little bit high and keep your 6M deposit rate marked at 1% (this controls what your forward curve expects tomorrow and the next day etc.), but your 2Y IRS is now updated to use the actual LIBOR fixing.

At 12pm the Bank of England cut rates by 25bp. The 6M LIBOR fixing for tomorrow is now expected at 0.9% so you have to set the deposit rate on your curve to around 0.9% in order to control it, but of course todays LIBOR was published at 1.005% so you must recognise that as a distinct rate.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.