How do I concretely quantify the delta of a single currency basis swap (ex:3mv6m LIBOR) ? Would you look at the PV impact for every bps change in the 3v6 tenor basis spread ?
Thanks in advance.
2 Answers
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Been away from a trading desk for a while and was not in flow rates, but presume you'd have a delta to the CSA curve (a discounting delta), and 2 projection deltas, one to 3m and opposing one to 6m. Neglecting the deviation of the sum from zero then quantum of delta overlap is effectively what you describe above I would guess? (i.e. I agree, however this is the basis delta to which you are sensitive if the legs compress / decompress, however there may also be some small residual outright delta if the 6m or 3m leg dominate, in addition as I say to some small discounting delta)
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The risk of a 6s vs3s basis swap is usually expressed in two dimensions a) the risk to the 6s 3s basis swap widening ( i.e. Increasing the forwards for 6s by 1bp in parallel while keeping the forwards for 3s constant ) and the delta risk ( moving the forwards for 3s upwards by 1bp).
Typically delta risk is only present in the "stub" at the short end of the curve. Beyond the next 6mo libor setting , it's a pure basis swap , but prior to that there may be outright delta risk if 6 mo libor has been set and one 3 mo libor has not yet been set.
