To give you a brief background, I'm valuing a fixed-for-float Interest Rate Swap (IRS) using Bloomberg. I put in a notional amount in (USD) and a assigned 6MO USD LIBOR as the reference index for the floating leg. I want to know how Bloomberg computed for the floating rates it used to compute for the floating cash flows and they told me that: 6MO USD LIBOR forward rate is computed using 3MO USD Swap curve then they did a basis adjustment to come up with basis adjusted forward rate. I would like to know how to compute for this basis adjusted forward rate? Thank you.


1 Answer 1


First a 3M Libor curve is built (using futures and 3M Libor swaps) and then they try to compute the adequate spread implied in the market between 3M and 6M LIBOR forwards.

For calculating this spread, they use tenor basis swaps like 3M-6M LIBOR basis swaps traded in the market. The 6M LIBOR is such that:

1) it's spread with 3M LIBOR matches the observed spread between 3M Libor forward and 6M Libor forward in 3-6M tenor basis swaps (traded OTC). This is mostly for shorter end of the curve.

2) The 6M forward obtained matches the 6M LIBOR swaps traded in the market. This is for the longer end of the curve.

Apply the implied spread on top of the 3M LIBOR forward rate to get the 6M LIBOR .


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