Dealer Polling with Noisy Reporting of Interest Rates

Abstract

The values of interest rate swaps and many other financial assets are functions of rates or prices determined in over–the–counter, interbank, or other off–exchange markets. Settlement contracts rely on rates routinely collected through dealer polling. Many standard contracts use a technique knows as trimmed means to guard against misreporting, whether unintentional or for market manipulation. The author examines this and other robust valuation procedures. Simulation indicates that other procedures may better guard against the worst case scenario arising from a false report.