Choosing Discount Curves for Derivative Pricing

Summary

The document asks how to select a yield curve for discounting cash flows when pricing bonds, swaps, swaptions, equity options, FX forwards, and FX options. It distinguishes government, swap, overnight-indexed, and reference-rate curves, and asks whether the appropriate curve depends on the instrument’s floating-rate reference, such as LIBOR or a risk-free rate.

It also questions the suggestion to use the rate earned on margin, pointing out that this may not answer the choice for trades without posted margin. No answer or pricing framework is provided, so the text identifies the curve-selection problem but does not resolve it. It offers no worked examples or evidence, and the discussion leaves instrument conventions, collateral terms, and curve construction details open.

Key ideas

• Derivative valuation requires a discount curve, and several curve types may be available.
• The document asks how curve choice varies across bonds, swaps, options, and FX instruments.
• It raises the possible relevance of floating-rate references and margin remuneration.
• It does not provide a curve-selection rule or worked pricing examples.

Tags

# What pricing curve to use for different instruments?


# What pricing curve to use for different instruments?












When pricing derivatives, their price depends on some yield curve, which is used to discount future cash flows.

But there are many yield curves, dependent on what they're bootstrapped from. There's government curves, there's swap curves, there's ois curves, and now there's rfr curves.

How do I know what yield curve to use for what instrument? The instruments I have in mind are bonds, swaps, swaptions, equity options, fx forwards and fx options. For bonds and swaps, does the answer depend on if the bond/swap is a float type that itself is referencing libor versus rfr versus ois?

Somebody told me "use whatever rate you get on your margin".

This answer is only useful for trades where a margin is posted, but that's only really equity options. What about the other cases I mentioned?

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