Skip to main content

suppose iSuppose I have a trade whose payoff underlying is 3m libor minus 1m libor. theThe standard approach is to bootstrap seperatelyseparately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve.
howeverHowever, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors, and when each seperateseparate curve is interpolated, the result is not the same as if the spread curve were interpolated. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates ,rates; b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor3m libor minus 1m libor? That would give a much smoother resulting forward basis curve and so P&L volatility would be in line with the variability of the market quoted basis curve.

suppose i have a trade whose payoff underlying is 3m libor minus 1m libor. the standard approach is to bootstrap seperately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve.
however, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors and when each seperate curve is interpolated, the result is not the same as if the spread curve were interpolated. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates , b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor minus 1m libor? That would give a much smoother resulting forward basis curve and so P&L volatility would be in line with the variability of the market quoted basis curve

Suppose I have a trade whose payoff underlying is 3m libor minus 1m libor. The standard approach is to bootstrap separately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve.
However, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors, and when each separate curve is interpolated, the result is not the same as if the spread curve were interpolated. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates; b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3m libor minus 1m libor? That would give a much smoother resulting forward basis curve and so P&L volatility would be in line with the variability of the market quoted basis curve.

added 205 characters in body
Source Link
Randor
  • 796
  • 1
  • 7
  • 25

suppose i have a trade whose payoff underlying is 3m libor minus 1m libor. the standard approach is to bootstrap seperately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve. 
however, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors and when each seperate curve is interpolated, the result is not the same as if the spread curve were interpolated. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates , b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor minus 1m libor? That would give a much smoother resulting forward basis curve? and so P&L volatility would be in line with the variability of the market quoted basis curve

suppose i have a trade whose payoff underlying is 3m libor minus 1m libor. the standard approach is to bootstrap seperately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve. however, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates , b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor minus 1m libor? That would give a much smoother resulting forward basis curve?

suppose i have a trade whose payoff underlying is 3m libor minus 1m libor. the standard approach is to bootstrap seperately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve. 
however, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors and when each seperate curve is interpolated, the result is not the same as if the spread curve were interpolated. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates , b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor minus 1m libor? That would give a much smoother resulting forward basis curve and so P&L volatility would be in line with the variability of the market quoted basis curve

Source Link
Randor
  • 796
  • 1
  • 7
  • 25

bootstrapping a basis curve to get a forward basis curve

suppose i have a trade whose payoff underlying is 3m libor minus 1m libor. the standard approach is to bootstrap seperately 2 projection curves: a) a 3m projection curve, b) a 1m proj curve. however, that gives rise to a big potential for excessive fluctuations in results due to having risk on both factors. Now, since the market gives quotes of the basis curve directly (there is a) the cash rates , b) the basis swap out to various tenors: 6m 1y 2y ...), why not just bootstrap the basis = 3mlibor minus 1m libor? That would give a much smoother resulting forward basis curve?