# Questions tagged [interest-rates]

An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).

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### Differences between main classes of interest pricing derivatives models

There seems to be 3 main classes of interest rate pricing models: 1) Short rate models, 2) Heath Jarrow models and 3) Libor Market Model. My book doesnt seem to explain why we need all these different ...
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A well known broker quotes cap/floors as spot premium for ATM straddles but forward premium for the skew, given that the difference between spot premium and forward premium is that the option is not ...
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### Interest rate risk calculation for Banking book

There is a detailed discussions on the Interest rate risk for Banking book. For Floating rate bond, this states like below - such positions generate cash flows that are not predictable past the next ...
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### Is there no problem when par rate is used for IRS stress-test?

I want to do stress-test such as principle component analysis on IRS(interest rate swap) in order to calculate risk for the future change in interest rate. However it is so confusing which interest ...
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### Pricing kernel representation

I am reading this paper https://mpra.ub.uni-muenchen.de/4969/1/MPRA_paper_4969.pdf pp.6-7 on discrete-time bond pricing. The model adopted is a a common affine model, the short rate follows \begin{...
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### Calibrate Hull-white one factor model with swaption in analytical formula

I've been trying to calibrate Hull-white one factor model with swaption but I have a trouble making closed form solution of swaption Below is the part of paper I've been referencing to https://people....
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### Implication of Humped Spot Curve on future spot curve(s)

I'm currently implementing a G++ model (Two Factor Hull & White model with constant parameters) on zero curve bootstrapped from USD IRS. Currently, USD IRS is humped at 30 years; swap rate goes up ...
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### What is the correct volatility to use for inverting Black76?

I'm using VCUB on Bloomberg for ATM cap volatilities and have noticed there are a few "flavors" of volatilities. I would like simply use ATM flat vols to bootstrap forward volatilities from ...
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### Hedging with FX swaps

I am trying to get the mechanic of the swap rollover. Funds usually hedge FX risk of their long term foreign assets (eg UST) with short term FX swaps (usually maturity < 1yr), by rolling over fx ...
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I have two questions regarding the terminology used on the practitioner side regarding asset swap spreads. Asset swaps are mainly used to retain the credit exposure of a bond while minimizing the ...
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### Where can (current) interest rate cap prices be found?

I'm somewhat new to interest rate models and am interested in obtaining ATM cap prices and volatilities for calibration purposes (Black-Derman-Toy, Hull-White, etc.). Ideally, this would enable me to ...
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### How is calculated the futures/forward convexity adjustment for FX?

I could find lots of stuff online for IR derivatives but it seems there isn't too much on FX for this specific adjustment.
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### FX swap implied yield from bloomberg

I am trying to reproduce the bid EUR implied yield I see in the screenshot below for 1y tenor which is -0.6226%. EUR implied yield bid = spot_bid/fwd_bid *(1+i_USD_bid) - 1 Inputs from BBG terminal: ...
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### Euribor + margin

I have this bond assigment where I have to calculate the CF each quarter, given a constant EURIBOR3M rate of -0,539%. There is also a 1,6% margin per annum that I have to take into account. The ...
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### Using compound interest rate in wrong way

I will explain the problem with an example. Today (14/03/2021) y agree a Zero-Coupon Mortgage with a nominal of a milion dolars an with an annual interest rate compounded annualy and with an ACT/360 ...
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### Missing observations in ICE Swap rates

While searching time-series data for different interest rate benchmarks, I found that for the USD, all observations are missing for the period between March 2020/April 2020. This discontinuity is ...
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### Why can a two-factor interest rate model not be used to value a coupon bearing bond as the sum of options on ZCBs

I am currently reading some notes which state that For one-factor models, the value of a European option on a coupon bond can be calculated as the sum of European options on zero-coupon bonds (ZCBs). ...
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### FX Forwards collateral and discounting

What is the market convention for discounting the future cash flows of FX forwards? In particular, I would be interested to know what discounting curves are used for both collateralised and not ...
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### resettable/MtM cross currency swaps

I am trying to understand the mechanics of resettable xccy basis swaps and put together a numerical example. I'd like to know if 1) periodic interest payments are calculated on the original notional ...
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### Can both good buying and good selling cause a bond to go special on repo?

A bond is known to go special when its repo rate gets particularly low relative to the GC (General Collateral) repo rate. In my mind, this can be caused by two scenarios: 1. Institutional interest to ...
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### AUD funding rates

I am looking into into AUD rates and I am a little confused. I tried to summarise below my doubts. FX swap basis (difference between AUD FX swap implied rate and AUD OIS rate). Before covid-19 it has ...
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### Fed fund market after QE

I read that before 2008, reserves of the banking system (vault cash and reserves at the Fed) fluctuated between \$40 billion and \$80 billion. However, as a result of quantitative easing, reserves ...
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### Issue with Monte Carlo Simulation on an interest rate tree in Excel

I need to build a Monte Carlo simulation model that does 10 iterations on the interest rate tree. I need to identify the interest rate given a sequence of moving up and down the interest rate tree. I ...
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### What are the practical costs of repo for a bond trading desk?

I appreciate what a repo/reverse repo transaction is, but I'm struggling to understand exactly how the cost of funding trades via repo works from a practical point of view for a bond trader. Current ...
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### Australian banks funding

"Typically, Australian banks pay a small premium to swap foreign currency into Australian dollars. This premium is also referred to as the basis, which is the difference between the implied cost ...
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### calculating risk free interest rate from put call parity

I'm trying to calculate the interest rate $r$ from the put-call parity. As per hull, put-call parity is given by the below equation. $c + Ke^{-rT} = p + S_{0}$ where: $c$ = current call option price ...
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### Cost of shorting currencies

I thought cost of hedging/going short on a currency with a forward was given by F/S-1 but it seems the author states 0.25% (see below). Am I missing anything (transaction costs, balance sheet costs, ...
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### Yield-to-maturity (YTM) vs effective annual rate (EAR)

If the yield-to-maturity (YTM) on a bond is 5%, is the effective annual rate (EAR) on the cash flows associated with the bond also 5%? I know that YTM does account for the present value of a bond's ...
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### Swaption extrapolation

I have some ATM swaption volatilities with the following characteristics: (-IBOR) payment frequency: 1M Underlying swap maturities (tail): 1Y, 2Y, 5Y, 10Y, 15Y and 20Y Swaption expiries: 1M, 3M, 6M, ...
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### FX futures valuation under negative rates

Market participants use negative interbank rates (LIBOR JPY/CHF) for the valuation of FX futures. Does this make any economic sense? Positive rates in valuation formula indicate opportunity cost of ...
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Usually carry trades involve borrowing in a low yield currency and invest in a high yield currency. For example, I borrow dollars and invest in Brazilian real. I then use a rolling FX swap to hedge ...
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### €str rates lower than ecb deposit yield

I have the following question : How can €str rate be lower than ecb deposit facility rates (deposit yield) ? Why would a bank lend money at that rate ? Thank you for your answers Edit : for instance ...
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### Japan benchmark rates

Can you please confirm on the following? The difference between TONA (also called TONAR), JPY Libor, TIBOR is that: JPY Libor, TIBOR are based on quotes from panel banks. The difference between them ...
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### Best way to lock in margin rate via hedging

I'm currently paying a 1.25% margin rate. This rate is based on the Fed Funds rate plus a margin. I would like to hedge against the possibility of this margin rate increasing. What is the best/...
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### Risk-free interest rate for option pricing from treasury yield curve rates

I am experimenting with an implementation of the Black-Scholes valuation for call options, and ran into the following questions: Black-Scholes pricing requires a risk-free interest rate. What is '...
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### Brazil FX market "cupom cambial" [duplicate]

I am trying to understand the role of cupom cambial (onshore dollar rate) in relation to the BCB swaps which are domestic NDF settled in real. "The cupom cambial is priced in basis points as an ...
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### Implementation of solvers for curve construction

I'd be really interested to hear people's experiences of implementing global solvers for curve construction, especially with regard to how robust the approach is in practice, numerical performance, ...
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### Money market yield question

Assuming the 92-day and 274 day interest rate is 8% (act/360, money market yield) compute the 182- day forward rate starting in 92 days (act/360, money market yield). 1)7.80% 2)8.00% 3)8.20% 4)8.40% ...
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### Are government bond yields usually expressed as yield to maturity (YTM) or annual yield?

If US 10yr = 2%, does it mean if I hold the bond until maturity/for next 10 years the yield is 2% or I get an annual return of 2% for 10 years? For example the yields in the link: https://www....
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### What is the name of this concept/formula?

I stumbled on this not so complicated concept and couldn't figure out what it's called. I want to buy something that costs $M$ units of money, and have to pay it in $n$ months at a rate of $\frac M n$ ...
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### What makes modeling interest rate derivatives very difficult compared to equity derivatives?

I understand while equity derivatives require the modelling of stock price at expiry, interest rate derivatives typically require modeling both the expiry and tenor, thus increasing the dimensionality ...
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### Calculation of monthly interest and capital repayment in a variable rate mortgage

In my exercise, I take out a 240,000€ mortgage from a bank which I pay off over a period of 30 years. The interest rate is a market index plus a spread. Initally the market index is 1% and the spread ...