Pricing

One important control is to ensure that the bank's trading positions assessed every day with the current market price → is called marking-to-market.

Yield Curve
- All financial instruments with future cash flow assessed by calculating the present value of cash flow that will be due on these instruments.
- Present value is calculated by discounting the future value using current interest → interest rates on the market are needed cash flow.
- To calculate the required market rate banks create a yield curve. Curve that is used by a trader is more complex and results from several instruments to ensure that the curve is consistent.
- Rate for a standard tempo jateuh (1, 2, 3, 6, 12 months and 2, 3, 5 years) can be observed from the curve but the rate for another time to enter rate is calculated by → perform interpolation.
- The value of products related to interest rates and all the products with cash flow in the future are sensitive to changes depending on the maturity curve and financial nature of the instrument.
- In practice, each of the major currencies have a number of yield curve that is used at the same time. The differences arise mainly from differences in the basic instrument used to create discrete points.
- The main type of interest rate-related yield curves are:
o Cash - this curve is used to re-assess their positions and fund loans. Point on the curve is determined by the standard maturity traded in the interbank market.
o Derivative - this curve is used to assess all types of derivatives, including options. Point on the curve is determined by a combination of instruments starting from the cash rate by a short maturity followed by a future contract. Finally, long term rates resulting from the swap rate for the standard trading period. The combination instrument is closely related to the basic instrument used to perform the derivatives risk hedger
o Bond - bond prices are assessed based on closing price on that day. However, some bonds are not actively traded or not traded every day. For the current bonds, closing price curve can be generated from the bond (bond curve). The curves are generated from a standard maturity traded in the government bond market. Bonds can be considered as a spread over government bonds (benchmark) when market prices are not available. This reflects differences oblogasi liquidity and credit standing of the issuer.
o Base - This curve was created to determine the price of instruments that are not actively traded on the interbank market, for example: rates set by central banks for discounting bills or the Base Rate in the UK. Curve generally shows a spread above or below the standard curve. Each point on the curve has the interest rate differential alone to mature on the standard curve.