FIA allows multiple curves to be assigned to each security.
Consider a corporate bond that has a AA credit rating. The bond's cash flows are priced off the AA zero curve instead of the AAA curve, and the bond's price is therefore dependent on both the level of the sovereign AAA curve and the spread between the AAA curve and the AA curve.
In general, FIA measures the return contribution made by changes in spreads between the curves assigned to each security. The process is similar to that for duration or STB sovereign curve attribution, but measures the extra return generated by changes in the set of sector or credit curves.
Specifying which yield curves to use
Assuming that you have set up one or more yield curves in the yield curve file, and that each curve has been given a suitable name, you may link as many curves as you wish to the securities in your portfolio.
To do this, edit column 11 (Curves) in the security master file and insert the names of the curves that you wish to use for attribution. FIA enforces the following rules:
- For a security whose pricing depends on an underlying yield curve, at least one curve name must be specified.
- Multiple yield curves can be associated with a given security by writing their names to the field and separating them by a pipe (’|’) symbol. For instance, if you have data for yield curves SOVERERIGN_CURVE, AA_CURVE, A_CURVE, , and you want to run attribution using all three curves, enter the following string into the ‘Curves’ field:
SOVEREIGN_CURVE | AA_CURVE | A_CURVE
Attribution on risk-free (or base) curves
- The first curve in the list is defined to be the base curve. Typically this is the AAA, sovereign or risk-free curve for the associated security - but it need not be. Some securities may not have a risk-free market available; others, such as swaps may need to be priced from a particular curve. In such cases, use the most appropriate curve for which data is available.
- Movements in this base curve will be decomposed and reported in the manner specified by the switch. For instance, if this switch is given a value of STB, then movements in SOVEREIGN_CURVE will be decomposed into shift, twist and curvature components.
Attribution on sector and credit curves
- Only the first curve's movements will be decomposed in this way. For other curves (if supplied), FIA will calculate return due to shifts between these curves, in the order specified. For instance, in the above example, FIA will also calculate the return due to changes in spreads between AA_CURVE and SOVEREIGN_CURVE, and between AA_CURVE and A_CURVE .
- Curve should be supplied in descending order of credit-worthiness.
- Different curves can be associated with different securities.
- Curves associated with securities can change over time, using FIA's effective dating capabilities.
- Different numbers of curves can be associated with different securities. For instance, you may decide only to link SOVEREIGN_CURVE to a AAA-rated government bond, and to link this sovereign curve and a sector curve to an A-rated corporate bond. In this case FIA will report a return for the sector curve to sovereign curve spread for all securities, but this return will be zero for the government bond, since only the base curve has been linked with this security, implying that no spread attribution was requested.