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I’m going through the exercise of building a swap curve.

I understand I need libor rates for the short-end, futures for the medium-end, and swap rates for the long-end. Should I be using bid, mid, or ask prices for these inputs?

Another somewhat related question: how do swap dealers hedge swaps? I can see a combination of a floating-rate bond and a fixed-rate bond working as a hedge, but also a portfolio of Eurodollar futures. Which is preferred?

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Always use mid market to build a curve. The hedging instruments used by swap dealers are interest rate futures, government bonds and repo markets (to finance the bonds). No one uses floating rate bonds.

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  • $\begingroup$ just expanding.. it is not really considered as a hedge by dealers to trade bonds against swaps. although that is generally accepted as less risky than a naked swaps position there are times when it is more risky (if the bonds have substantial vol e.g. based on QE decisions by central banks). rather it it would be considered an active risky position. swaps vs swaps is only combination considered 'fully hedged'. $\endgroup$
    – Attack68 ♦
    Mar 6 '18 at 20:15

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