1
$\begingroup$

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?

Thanks

$\endgroup$

1 Answer 1

3
$\begingroup$

Since the 10 year and 30 year swap spreads are frequently traded and have time series available, think of this as a 2 variable problem. You then have a simple "spread of spreads" trade which is easily analysed using PCA type methodology. You should find a high correlation between these two spreads, so the variability of the spread of spreads is quite low.

$\endgroup$
0

Your Answer

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

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