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Sorry, this might be basic for some of you but I'm very confused when it comes to know which curve (6m or 3m) we can use for valuations of swaps and swaptions. Could someone please explain when to use the 6M curve or 3M curve ? and why ? Thank you

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You use the curve that describes the floating rate index to estimate the floating rate cashflows, a swap against floating 3M uses a 3M curve to forecast the cashflows.

And then you use a discounting curve to discount the future cashflows that aligns with the funding/collateralisation of the derivative. For example almost all cleared swaps will use the OIS curve for discounting. Very few use either the 3M or 6M curve.

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  • $\begingroup$ Thanks I needed this to be sure I understand this correctly. $\endgroup$ – Gogo78 Nov 26 '19 at 15:05
  • $\begingroup$ Actually there is more than "very few" use of the 3M or 6M curves: they are generally used in non-collateralised transactions, since the MtM is funded by the counterparty to which the derivative has a positive value. 3M or 6M is basically a choice of the dealer corresponding to their funding costs. $\endgroup$ – siou0107 Nov 27 '19 at 14:25
  • $\begingroup$ @siou0107 you should not be discounting "cleared swaps" with OIS, but I agree with you many use 3M or 6M for non-collateralised discounting. Arguably the number of these trades is relatively few compared to cleared. Additionally 3M or 6M do not even represent a good proxy for the funding costs, and some academics even suggest using OIS + a funding spread and completely eliminate the notion of libor, but it has often stuck mainly for legacy reasons and unwillingness to adapt valuation systems. $\endgroup$ – Attack68 Nov 27 '19 at 16:54

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