Precious metals are trading commodities. But a precious metal quote is very similar to a Forex quote. The quote is represented in the same way as a quote for a currency pair. For instance, the spot gold traded against the US dollar is XAU/USD.
There is only one base interest rate per currency, corresponding to the bank’s unsecured lending/borrowing rate (such as LIBOR). The interest rate used to discount cashflows may include a credit spread above or below the base rate.
There are two types of returns calculated during calibration depending on whether the risk factor is an absolute risk factor or relative risk factor. In addition, certain types of commodity risk factors require special treatment near the time of contract expiry - a process referred to as roll-over adjustment.
Financial data are known to be far from normal and replete with outliers, many of which result from “dirty” data – data that contain errors. Such errors introduce extreme or aberrant data points, which can significantly distort parameter estimation results. Therefore, robust estimations are required to achieve stable and accurate results.