8.2.5 Example: 2nd-Day Valuation Discount Curve
Most Libor rates are quoted for 2nd-day valuation. For this reason, it may be convenient to employ 2nd-day valuation in certain value-at-risk measures. In the last example, we constructed a discount curve based upon cash valuation. Let’s now construct the same discount curve, but base it upon 2nd-day valuation.
We could start with the Libor quotes of Exhibit 8.4 and build the discount curve from there. Let’s take a simpler approach. When we change from one value date to another, all we need do is accumulate forward or discount backward to the new value date. In this manner, we can construct our 2nd-day valuation curve from the cash valuation curve that we constructed in the last example. We accumulate all discount factors by τ(2) = 4 basis days by dividing by the 4-day discount factor [8.2]. Results are indicated in Exhibits 8.8 and 8.9.
Because the 4th basis day—May 14—is the value date, it has a discount factor of 1.0. Discount factors for shorter maturities exceed 1.0. They are actually accumulation factors. They accumulate cash flows forward to the value date.