BSE launches Zero Coupon Yield Curve

The Stock Exchange, Mumbai 'BSE', as a part of its initiatives towards development of Debt Market is introducing the Zero Coupon Yield Curve (ZCYC) with a view to launch exchange traded derivatives in the future. The BSE Debt Segment provides a range of products and services to investors and participants in the Indian Fixed Income markets.

Zero Coupon Yield Curve :
The term structure of interest rates or the yield curve describes the market's view of the interest rates for various lending periods. These rates form the backbone of the fixed income market and are used to price a wide array of products of differing complexities.

The instruments that do not make periodic interest payments and wherein the principal amount together with the entire outstanding amount of interest on the instrument is paid as a lumpsum amount at maturity are known as 'zero coupon' instruments. These are sold at a discount to the redemption value, the discounted value being determined by the interest rate payable (yield) on the instrument.

Salient features of the Methodology :
The methodology used for creation of ZCYC is based on cubic splines.

Spline based methods, instead of fitting the whole curve with a single parametric equation, fit the term structure with a continuous piecewise polynomial that while preserving the smoothness of the curve ensures that the local variations peculiar to that term structure bucket are factored in.

The curve is generated using market data (NDS data) of the most liquid securities traded on a day , as within the universe of the G-Secs, only a few securities are frequently traded.

The ZCYC is developed in a way that it ensures producing minimal pricing errors while valuing the liquid securities in the market place.

The Exchange is inclined towards development of an efficient Yield Curve which will help proper pricing of debt portfolios using Zero Coupon spot rates to all market participants. This would also lead to availability of a new product to trade in / hedge interest rate risk in the market

The BSE's website : www.bseindia.com will carry comprehensive information on the Zero Coupon Yield curve methodology.

The ZCYC values shall be available on the Exchange's website for the previous trading day, prior to beginning of market hours. The same shall be made available for downloading by the viewer in a zip format.

The publication of the ZCYC values will commence from Thursday , April 29 , 2004.

Dr. Bandi Ram Prasad
Chief General Manager.