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Choosing the Overnight Rate for a JPY Discount Curve

Article Quant Q&A · Author: rex
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Summary

The document considers which overnight deposit rate to use at the short end when building a Japanese yen overnight indexed swap discount curve: an offshore JPY deposit rate or an onshore Bank of Japan deposit rate. Its central principle is to select the rate that best reflects how collateral for the relevant instruments is priced and managed. If the instruments' overnight collateral is managed using offshore JPY deposits, that rate may be the more appropriate curve input.

The answer offers a practical criterion rather than a universal rule or a full curve-building procedure. It does not compare the rates empirically, specify market conventions, or discuss how to handle differences between collateral arrangements across instruments. The choice therefore depends on the collateral terms relevant to the portfolio being valued; the document supplies no broader evidence that one benchmark is always preferable.

Key ideas

  • Choose a short-end curve input that reflects the pricing of collateral on the instruments being valued.
  • Offshore JPY deposits may be suitable when overnight collateral is managed using that rate.
  • The document gives a conditional selection principle, not a universal preference between offshore and onshore rates.
  • It does not provide empirical comparisons or a complete curve-construction method.

Tags

Fixed incomeDerivatives pricing
Full text
# Building curves using onshore or offshore JPY overnight rates?


# Building curves using onshore or offshore JPY overnight rates?












I am trying to build Japanese Yen interest rate curves. When defining the curve instruments for the 'OIS' (discount) curve (aka TONAR), I am uncertain as to which rate to use for the overnight deposit at the short end. Should I be using the offshore jpy depo rate or the onshore BoJ depo rate; and why?

## Answer by closedloop (score 1)

https://quant.stackexchange.com/a/17097

Generally it is best to use the rates that best capture how the collateral of the instruments are priced. If the overnight collateral on the instruments is managed using offshore JPY depo, then this would be a good choice.

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.