Interpolating Stub-Period Fixings from a Three-Month Libor Curve

Summary

The document raises a curve interpolation question: how to estimate a two-month point when the available term structure contains three-month Libor zero rates at three-month intervals. The response clarifies that these are points on a term structure of three-month Libor zero rates, rather than separate six-month and nine-month spot rates.

It connects the issue to setting a fixing for a stub period whose length differs from the index reset frequency. The answer points to the methodology described in ISDA contracts as relevant guidance. However, the excerpt does not provide the actual interpolation formula, conventions, or worked calculation, so it is not enough to implement a fixing method on its own. It is most useful as a conceptual correction and pointer: identify the curve as a tenor-specific zero-rate term structure, then consult the applicable contract methodology for irregular reset periods.

Key ideas

• A curve built from three-month Libor instruments represents a term structure of three-month Libor zero rates.
• An irregular stub period can require a fixing that does not align with the index reset frequency.
• The answer directs readers to ISDA contract methodology for handling such stub-period fixings.
• The excerpt supplies no interpolation formula or numerical example, so implementation details require an external methodology reference.

Tags

# How do we determine 0M spot rate for 3M libor?


# How do we determine 0M spot rate for 3M libor?












Say I have a 3M libor curve constructed from a bunch of 3M FRAs, so I have a 3M spot rate, a 6M spot rate, a 9M spot rate, etc.

For points in-between, say 4M, I would have to interpolate between the 3M and 6M points.

But how would I interpolate a 2M point? That would require a 0M spot rate, i.e. the instantenous rate -- how do I get that?

## Answer by aghilario (score 1)

https://quant.stackexchange.com/a/78400

As Alex indicates, these are not 6M/9M spot rates but a term structure of 3M Libor (zero) rates.

What you're describing happens quite often when determining the fixing for a stub period that is unequal to the reset frequency. See here a description and example of the methodology that is generally applied in ISDA contracts.

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.