0
$\begingroup$

How would one calculate the fair level of 3s1s single currency basis swaps using simply the 1m & 3m libors and ois levels? (so you have fra-ois spread levels in both)

I understand that as the FRA-OIS basis widens, the fair level of 3s1s would increase, but unsure how that level is calculated?

So if one entered a 1y basis swap at Xbp over 1mth, how would the stub risk be hedged (in ois since libors are not tradeable) and how does that translate back to finding a fair 3s1s level?

Thanks

Improve this question
$\endgroup$

1 Answer 1

Reset to default
1
$\begingroup$

The 3s 1s basis cannot be calculated in an arbitrage sense. You can make some reasonable assumptions. For example , if fra/iOS is tighter on s forward basis than spot, then 3s 1s is likely to have a similar term structure. But flows in the market may move it away from intuitive levels.

Improve this answer
$\endgroup$
2
  • $\begingroup$ thanks. if (theoretically) you had fra/ois markets for every 3m and 1m set, then the 3s1s could be implied by that? ie if 1mth FRA-OIS is 15/14 and 3mth fra-ois is 30/29 for every day in this next year then the 1y 3s1s market implied is 16/14 (30-14) / (29-15) $\endgroup$
    – Sam4343
    Commented Nov 1, 2016 at 18:01
  • 1
    $\begingroup$ yes that's true, with a minor quibble about daycount (30bp is quarterly, 14bp is monthly but it makes no difference at these rate levels) $\endgroup$
    – dm63
    Commented Nov 2, 2016 at 2:17

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.