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I was reading this article on Tenor basis spreads(http://www.garp.org/media/1160302/052913_tenorbasisspread.pdf).

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Why is the tenor basis spread for NUSD for 1mv3m negative and NUSD for 3Mv6m positive? How do u know it will be positive and when it will be negative?

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In the presented method we have one main tenor, which is 3M in the case of USD. The Adjustment is negative if we want to adjust a tenor shorter than 3M e.g. 1M. It is positive for greater tenors like 6M or 1Y.

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  • $\begingroup$ Both these adjustments are added to the 3M side. Am i right? $\endgroup$ – lakesh Mar 4 '17 at 5:33
  • $\begingroup$ No, on the contrary. The adjustments are added for calculating the forwards of the non-main tenors. The method assumes, that we have parrates for 3M. With these the forwards of the 3M leg can be calculated. To calculate the e.g. 1M forwards adjust the 3M parrates by the red numbers. $\endgroup$ – Ami44 Mar 4 '17 at 8:42
  • $\begingroup$ Thanks for your help. One more qn: what will the difference if instead of paying 1m receiving 3m, it is receiving 1m vs paying 3m? It will be a addition right? $\endgroup$ – lakesh Mar 5 '17 at 1:19
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    $\begingroup$ If you add or substract has nothing to do with which is the receiving and which is the paying leg. You substract, if the tenor is shorter than 3M and add if it is greater. Than you calculate your zero curve from your adjusted par rates. From the zero curve you determine the forwards and with the forwards you can calculate the npv of your swap leg. Than you get the npv of your swap as $npv=npv_{rec}-npv_{pay}$ $\endgroup$ – Ami44 Mar 5 '17 at 19:02
  • $\begingroup$ Thank you very much for your explanation. Made things so clear for me. $\endgroup$ – lakesh Mar 6 '17 at 2:17
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I would explain it slightly differently. The data shown indicates the market price of basis swaps. The spreads shown are to be added to the 3 mo libor leg of the basis swap. For example , the 5yr basis swap price is 3m libor minus 13bp versus 1m libor , and also 3m libor plus 14bp versus 6m libor. The spread is usually negative if you are swapping to a shorter rate, and positive if you are swapping to a longer rate. That's because the rate for a 3 month loan is usually higher than a chain of 1 month loans, and the rate for a 6 month loan is usually higher than two 3 month loans made consecutively.

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  • $\begingroup$ what will the difference if instead of paying 1m receiving 3m, it is receiving 1m vs paying 3m? does this make any difference at all? $\endgroup$ – lakesh Mar 5 '17 at 16:14
  • $\begingroup$ you can pay 3m libor -13bp versus receiving 1mo libor, or you can receive 3m libor - 13bp versus paying 1mo libor. Well, in practice the dealer will charge some bid-offer, so you can pay 3m libor -12bp versus 1mo libor, or you can receive 3mo libor -14bp versus paying 1mo libor $\endgroup$ – dm63 Mar 5 '17 at 17:42
  • $\begingroup$ so basically what you are saying is there is no difference between the both. If you are swapping to a shorter rate, it is negative and if swapping to higher rate, it is positive. Am i right to say this? $\endgroup$ – lakesh Mar 6 '17 at 2:15

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