Questions tagged [interest-rate-swap]

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What is the Swap Curve?

What is the so-called Swap Curve, and how does it relate to the Zero Curve (or spot yield curve)? Does it only refer to a curve of swap rates versus maturities found in the market? Or is it a swap ...
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26 votes
6 answers
57k views

how to derive yield curve from interest rate swap?

According to some textbooks, to derive the yield curve, quote overnight to 1 week: rates from interbank money market deposit, 1 month to 1 year: LIBOR; 1 year to 7 years: Interest Rate Swap; 7 ...
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16 votes
4 answers
41k views

Difference between OIS Rate and Fed Funds Rate

I understand Fed Funds Rate is the rate at which banks lend/borrow to/from each other to maintain their daily reserve requirements at the Central Bank; also it is unsecured-meaning no collateral. Is ...
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  • 161
11 votes
4 answers
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What is the correct convexity adjustment for an Interest Rate Swap with unnatural reset lag?

I am looking at the valuation of an Interest Rate Swap (IRS thereafter) which is pretty much vanilla with one small tweak. Floating leg pays 3 months LIBOR in monthly intervals. To be precise: ...
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  • 191
10 votes
2 answers
8k views

Why using the swap curve as riskfree rate and no longer gov bonds?

I recently had an interview where I was asked what to use as risk-free rate. In all my textbooks it was always the US treasury yield curve. But they said no its now the "swap curve". Why is the swap ...
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  • 5,649
9 votes
3 answers
741 views

LIBOR Cessation: Construction of Term-RFRs as LIBOR Fallbacks; Forward vs. Backward Looking

This question emerged from comments in this feed: OIS rate to build Term structure. I was wondering how the float leg of an IRS will look like in a post-LIBOR world. Assume the following time-line, ...
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  • 573
8 votes
1 answer
5k views

Use QuantLib Python to calculate Swap DV01

I would want to use QuantLib Python to calculate DV01 of an interest rate swap. Initially I was thinking of calculating the fixed leg DV01 and floating leg DV01 separately, then add both legs DV01 ...
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  • 237
8 votes
2 answers
860 views

Looking for a pricing library supporting Mutli-curve Framework

I am looking for a builder of Yield curves by tenors (O/N, 1M, 3M, 6M, 12M) respect to a given discount curve based on multi-curve framework as described below : Interest-rate Modelling with Multiple ...
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6 votes
1 answer
757 views

SOFR Discount Curve Construction in Nov 2021

On July 29, 2021, the Alternative Reference Rates Committee (ARRC) formally recommended the forward-looking term rates based on SOFR published by the CME Group. CME currently publishes Term SOFR for ...
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  • 103
6 votes
3 answers
3k views

Interest Rate Convexity - Fundamental Question

I have a very basic question around convexity adjustments in swap valuations. I am comfortable with the mathematical derivation of the convexity adjustment. My question relates to when and why a ...
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  • 93
6 votes
1 answer
2k views

Why are multiple custom curves (swap) built for one desk?

Currently in a journey of learning and getting my hands a bit dirty with Interest Rate Swaps. Why there are multiple customized curves built by many even within one desk? For e.g. Short Rates desk ...
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  • 513
6 votes
1 answer
390 views

Transition to SOFR Swaps and single curve pricing

As in the US there is a push to replace IBOR based swaps with SOFR rate does that mean that SOFR swap pricing will return to using a single curve framework as LIBOR swaps did pre the financial crisis?
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6 votes
0 answers
885 views

Swaptions on SONIA/SOFR/ESTR

Given that LIBOR is being decommissioned and we must start building liquidity in swaptions on the OIS swaps, how do we price them? i.e. If I have a swaption on SONIA/SOFR/ESTR etc how does the pricing ...
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5 votes
5 answers
17k views

Carry calculation on an interest rate swap

I was hoping that I can get help on a simple yet not so straight forward topic : Looking at valuing the costs of holding an IRS in the books this would entail marketed-to-market due to price ...
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5 votes
4 answers
2k views

Why does the ultra long-end of a yield curve invert?

The shape of the yield curve (at least in the GBP Rates market) is upward sloping from the front end up to the long end (i.e. 30y), but then begins to become downward sloping as we go beyond 30y and ...
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  • 407
5 votes
1 answer
9k views

interest rate swap: PV01 vs DV01

Bloomberg defines PV01 as PV of adding 1 bps on a fixed coupon , while 'DV01' as (down - up principal) / 2 * bps shift. The ...
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5 votes
1 answer
5k views

What is the difference between OIS Swap vs Basis Swap?

What is the use of OIS Swap Curve vs. Basis Swap Curve?
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5 votes
2 answers
7k views

Calculating Cross Currency basis swaps

I am trying to calculate cross currency basis swaps for personal use. I generally understand what they are (essentially swapping one currency for another currency on a floating interest rate basis) ...
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5 votes
1 answer
3k views

Pricing an interest rate swap using Eurodollar futures

I see this posted but no answer given. I think it would be a good idea if we have a question on here to illustrate an example of how to price an interest rate swap. So far, I understand that that for ...
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  • 577
5 votes
4 answers
12k views

Calculate OIS rate 3 months, 1 year

I don't know if there are any similar posts in this forum but I’m trying to describe below all things that I understand about OIS rates and Libor rates. Please correct me if I’m wrong somewhere. I am ...
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5 votes
1 answer
206 views

Market Convention to Price Interest Rate Swaps (post LIBOR transition)

Prior to the onset of the Global Financial Crisis in 2008, interest rate swaps were priced using a so-called "single curve framework". Under this framework, the LIBOR curve was used to ...
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4 votes
2 answers
2k views

Swap curve construction

I am new to this area so my question might be basic to many but please answer. For valuing interest rate swaps how will we define which curve to take, like sometimes we use usd 3m curve, or usd 3mv 6m ...
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  • 115
4 votes
4 answers
8k views

Why does the valuation of the floating leg of a swap only use the next payment?

At time $t=0$, swap has zero cost. In fact, both parties may have valued the swap differently based on their zero swap curve-but somehow they agreed. Once a swap is agreed upon it cannot be dissolved ...
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  • 1,688
4 votes
1 answer
4k views

EuroDollar vs FRA

I am not quite clear about this. When people mention Eurodollar are they mean Eurodollar Futures? One of the difference between Eurodollar and Forward Rate Agreement(FRA) is basically difference ...
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  • 73
4 votes
2 answers
2k views

Difference between OIS Rate and Risk-Free Rate

What exactly is the difference between the fixed rate of an OIS and the risk-free rate in that currency. For example, in the US the OIS rate vs. risk-free rate SOFR or in the UK the OIS rate vs. the ...
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  • 141
4 votes
1 answer
2k views

What is Dual Curve Bootstrapping? And how to do it, with an example?

I am starting to explore this area. My ultimate aim is to build a 3 month LIBOR forward curve. 1) I wish to know what exactly 'Dual Curve Bootstrapping' is (If someone could explain it in clear ...
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4 votes
1 answer
2k views

European Swaptions: does implied volatility of swap rates decreases both with start and tenor?

Does implied volatility of swap rates decreases both with start and tenor? Given a Swaption price and a discount curve I calculate the swap_rate from the curve, then I define implied volatility as ...
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  • 235
4 votes
1 answer
461 views

Term SOFR rate formula

The following website gives the specifications of the CME Term SOFR reference rates: CME Term SOFR. Point 1 in the link above specifies that the tenors that are currently supported are 1m, 3m, 6m, and ...
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  • 5,191
4 votes
1 answer
249 views

Market convention for building the front-end of the SOFR discounting curve

In SOFR Discount Curve Construction in Nov 2021, @dm63 does an excellent job describing the way to build the SOFR discount curve. A few questions: What is the market convention for building the ...
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4 votes
2 answers
469 views

Different types of swaps and generalized pricing structure - correlation swap, variance swap, volatility swap, gamma swap, etc

I am very new to derivatives pricing, and I am currently trying to learn these on my own. As far as I can tell, most of the derivatives that are simple (in the sense of having a constant strike that ...
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  • 155
4 votes
1 answer
489 views

Difference between FRA and a zero coupon swap

Wanted to know the difference between an FRA and zero coupon swap with both legs having payment at maturity. If the zero coupon swap is forward starting, will it be equivalent to an FRA?
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4 votes
2 answers
2k views

IR Yield Curve and Fixing Dates

Consider two FRAs. 3x6 , Effective 3 months from now, terminates in 6 months. The floating leg payer pays 3-month LIBOR. Fixing date for LIBOR 40 business days. To price this at par, the fixed leg ...
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  • 161
4 votes
2 answers
972 views

If floating leg in an arrears swap is paid on the date then valuing them is like predicting future

From what I am reading arrears swap are paid on the same day(actually, +2 business days for JPY and USD) as the reset date. To me then, a week before the reset date the floating rate is not known. ...
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  • 1,688
4 votes
2 answers
1k views

ISDA SIMM swap sensitivities

Most of the commercial SIMM models require sensitivities to be passed in in CRIF format. The documentation mentions that "par sensitivities" need to be used. What exactly is a par sensitivity? When we ...
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4 votes
1 answer
1k views

Pricing interest rate swap in Ho Lee model

In Ho Lee model, assuming risk neutral probability is not exactly 0.5, would a change in the volatility of short-term rate affect the price of an interest rate swap? My intuition tells me no as ...
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3 votes
2 answers
5k views

Does an Interest Rate Swap has a Vega component?

I am a bit confused on how you calculate vega for Interest Rate Swap. One argument is that IR Swap is a combination of fixed rate bond and floating rate bond. Since a bond has no vega component, IR ...
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3 votes
4 answers
1k views

What is the relation between the USD Swaps Rates and US treasuries?

I asked this question HERE and redirected to https://quant.stackexchange.com I understand a swap rate is the fixed leg on a IRS (source), and a swap spread is the difference between a swap rate and ...
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3 votes
2 answers
313 views

Can we think of Overnight Index Swaps as short-term IRS?

OIS are a series of fixed-rate cashflows discounted at the overnight rate, swapped for overnight (floating) rate. IRS are similarly discounted fixed-rate cashflows, swapped on an IBOR-floating rate. ...
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  • 55
3 votes
2 answers
7k views

Mid-curve swaption

I would like to know how the mid-curve swaption could inform us about forward volatility. In my understanding it is a swaption on a forward starting swap. Let us say the midcurve swaption expires ...
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  • 426
3 votes
2 answers
283 views

SOFR Transition

I have few doubts regarding transition from IBOR to SOFR rates. How will the method of calculating/estimating curve rates change after changing to SOFR? Will there be any change in valuation ...
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  • 115
3 votes
3 answers
2k views

Cross Currency Swap

1) What is the difference between Cross Currency Swap and Cross Currency Basis Swap? Appreciate if this can be explained in layman's terms. 2) Could you advise me which swap rate to be used for the ...
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  • 31
3 votes
1 answer
2k views

Swaption Trading

In most Banks, the Traders are provided with ATM Implied vols across different Swaption Expiry's and different Underlying Swap Maturities.(The ATM Implied Vol Cube) If the trader wants to trade an ...
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  • 363
3 votes
4 answers
5k views

IR Swaps - Curve sensitivity at maturity node

I was recently trying to price some IR swaps in BBG. I noticed that when I shock the yield curve up by 1bps at a single specific node, the DV01 is close to zero except at the node nearest the maturity....
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3 votes
1 answer
243 views

USD swaps trading post LIBOR: the current state of the world (January 2022)

The USD interest rate swaps market has been transitioning from LIBOR to SOFR for some time. In the "old days" when swaps reset against LIBOR underlyings, there were a few "market ...
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3 votes
1 answer
2k views

Inflation swaps rate vs. Break-even rate

Can someone explain me the difference between zero coupon inflation swap rate and breakeven rate? For example, currently, US 10y zero coupon inflation swap rate is about 1.4%, while US breakeven 10y ...
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