Real-world interest rate calibration: how to make an assumption for the long term swap spread
Document ID: 2010-1839
Published on: 21st May 2010
Author: Ruosha Li, Zhuoshi Liu and Steffen Sorensen
Risk-free interest rates are important for valuation of liabilities and the calculation of prudential capital. Moreover, from a financial economics perspective, the risk-free interest rate is the benchmark for the riskiness of an asset. Two competing yield curves provide a term-structure of risk-free interest rates: the swap and government curves. In this note we explain our methodology for making a long-term limiting ('through-the-cycle') assumption for the swap spread.
