I have PCA models to capture Risk for Swaps trading
I have a question regarding a multi-leg package which has 4 legs (box spread).
Typically, a box spread is a switch between two Swap Spread, where a Swap Spread is trading the spread between the Swap and the Bond yield. So the 4 leg package has 2 Swaps leg and 2 Bond leg.
For example, the following structure:- Leg 1: Buy the 10Y Swap Leg 2: Sell the 10Y Bencmark Bond Leg 3: Sell the 30Y Swap Leg 4: Buy the 30Y Benchmark Bond
The trade is done as a relative value trade since the trader thinks the 10Y swap spread is cheaper relative to the 30Y Swap spread. What's the best way I can capture the risk of this package, using a PCA model?