I'm trying to create a static hedge for a forward swap using two spot starting zero coupon swaps (to prove that there is no convexity adjustment needed). Here are the instruments -
- Paying fixed in 1y1y forward swap
- Paying fixed in spot starting 1y zero coupon swap
- Receiving fixed in spot starting 2y zero coupon swap
Problem is #3 does not have cash flows at t=1y, so there is no way to cancel out that exposure from #2. Could someone please point out my mistake.