Questions tagged [swaps]
Swaps are a common name for exchange operations between two (or more) counter-parties with various financial instruments like cashflows (IRS), currency (XCCY), credit risk (CDS), et cetera
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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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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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Cross Currency Swap Pricing in nowadays environment
Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ...
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Why would an investor trade a variance swap over a volatility swap?
Why would an investor trade a variance swap over a volatility swap? Is it simply related to the leverage involved in a Var (i.e. sigma-squared) or is there something else to it?
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What is the reason for the convexity adjustment when pricing a constant maturity swap (CMS)?
I'm trying to wrap my head around pricing a Constant Maturity Swap (CMS). Let's imagine the following deal: 6m LIBOR in one direction, 10y swap rate in the other. The discount curve is derived from ...
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Derivation of VIX Formula
I've read a lot of derivations about VIX formula. I can say it is -adjusted- fair strike of variance swap. But I can't see how it goes from variance swap rate to VIX formula. In particular I can't see ...
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Deriving Interest Rates
I am trying to teach myself about interest rate swaps, how they are priced, etc... Easy enough - just comparing cash flows of fixed and floating rate bonds.
However, what I'm struggling with is how ...
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Convexity adjustment for a forward swap rate
I recently heard that for a forward swap rate (for example, the fixed rate of a swap that will start in one year and end in five years), I need to do a convexity adjustment in order to get the right ...
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Why is a variance swap long skew?
I can appreciate the mathematical derivation, but can anyone explain this in a more intuitive sense?
I often come across the mistaken belief that due to the replicating portfolio being long more ...
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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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How to build the short end of a zero coupon curve for non-core Eurozone countries?
I am in the process of building zero coupon curves for some countries in the Eurozone.
I have the following data sets:
Euribor and EONIA
Swap rates
Bond price and yields
The bond prices (and thus ...
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Where do swap rates and/or long-term forward rates come from?
I apologize if this is supposed to be obvious, but ... . Libor spot rates are quoted up to a year, beyond that one can use Eurodollar futures to continue to build the curve. Let's say up to 3 years. ...
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Calculate interest rate swap curve from Eurodollar futures price
So I was reading Robert McDonald's "Derivatives Markets" and it says Eurodollar futures price can be used to obtain a strip of forward interest rates. We can then use this to obtain the implied ...
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Why is USD LIBOR used for USD denominated securities?
I am just starting on Interest Rate Swaps & curve construction. While reading few materials on Interest Rate Swap, it's indicated for e.g. "Floating Coupon Index: 6 month USD LIBOR".
LIBOR is ...
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Why is CSA currency OIS rate used in discounting instead of local currency OIS?
I have been struggling to understand the logic behind cross currency OIS discounting (where cash flows happen in different currencies than the collateral is paid). I will illustrate my question ...
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Varswap Basis - What is it in practice?
What is the varswap basis? I am not completely sure what this number represents. Is it the basis between the estimated future realized volatility and the vol surface implied volatilty at a specified ...
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Forward and discount curves for cross currency swaps
I have a EUR-GBP cross currency swap, collateralised in GBP, each leg is paying 3m EURIBOR/LIBOR respectively. I know GBP leg can be modelled with 3m LIBOR forward curve and GBP OIS discount curve. ...
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How to calculate a forward-starting swap with forward equations?
I have been trying to resolve this problem for some time but I cannot get the correct answer. The problem is the following one.
Compute the initial value of a forward-starting swap that begins at
...
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Replicating Bloomberg Swap Prices with QuantLib
I'm trying to learn more about the QuantLib python package and as an exercise I'm trying to replicate some swaps on Bloomberg. However, when I do so, it seems like my swaps are consistently ...
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Two practitioner questions about asset swap spreads
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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Is it true that pricing an IR swap doesn't require any stochastic model but calculation of the PFE of an IR swap would?
Pricing an IR swap doesn't require any stochastic model but calculation of the PFE for an IR swap would require the Hull White Model or any other stochastic short rate or forward rate model.
Is this ...
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Exposure calculation of a re-coupon swap
How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity).
It's used to reduce the ...
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What is a Constant Maturity Swap (CMS) rate?
I have been searching in books and on the internet for a basic definition and explanation of CMS rates, but I cannot find anything clear and simple. Can you explain (maybe with an example) what a CMS ...
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Why do FX Swaps have Interest Rate Risk?
I know that FX Swaps have FX Risk, but why do FX Swaps have Interest Rate Risk as well?
Need some guidance on this.
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Spot/Next and Tom/Next FX forward swaps
could somebody please tell me what is the main difference between Spot/Next and Tom/Next FX forward swaps? I know that both are used to roll spot FX position settlement to 1 day forward but I really ...
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What is a standard credit default swap contract and where can I find spread data? What alternatives exist to judge creditworthiness?
I'm doing some work for a company and one of my tasks is to research credit default swaps on banks and to write a page about them explaining what they are and how they're used to evaluate the banks' ...
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Discount curve and payment frequency
In case of uncollateralised trades, where we use LIBOR rates for discounting, does the LIBOR tenor have to match with the payment frequency?
For example, one of the swap leg pays USD floating amount ...
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Static and Dynamic Hedging of Vol/Var Swaps
Why can a variance swap be perfectly statically hedged whereas a volatility swap requires dynamic hedging?
Possible reference request to the corresponding literature.
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Replicating QuantLib plain vanilla Interest Rate Swap valuation
I'm learning QuantLib-Python and trying to replicate an Interest Rate Swap valuation on a custom curve constructed by passing lists of dates and discounting factors. Please see my code below
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Basket equity swap
What are the advantages of buying basket equity swaps derivative compared to single equity swap? Will correlation play a role in basket equity swap?
Thanks in advance
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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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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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Downward Sloping Swap Spread Curve
After observing swap spreads in the market, I have noticed that the swap spread curve is downward sloping. Why is this? I have tried looking around the internet for answers, but have not found ...
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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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What does **Long Call EURUSD** mean?
What does Long Call EURUSD mean? Does it mean Long Call EUR and Short Put USD? When we draw payoff do we consider only w.r.t. to CCY1 i.e. EUR in this case?
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How do insurance companies use interest-rate swaps?
I have heard that insurance companies make use of swaps and am just trying to get some clarity on that:
An insurance company (assume life insurance) has a fixed obligation to pay in the distant ...
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How to hedge the fixed leg of a swap contract?
I happened to get this question for Fixed Income Swap contract. (let's assume it's it's not cross currency).
If the fixed leg is paying 10% interest rate in this contract, but in the market the ...
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Vol swaps Vol of vol
I an quite unfamiliar with those products and would like to understand why they require a vol of vol model for pricing. The variance swap is replicated (assuming no cash dividends) with a delta hedged ...
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Replicating Log Contract - Errors Introduced by Jumps
In the GS Research Note about Volatility Swaps, it is shown that you can replicate a pure variance exposure (hedge) with only vanilla calls and puts, primarily thanks to the Carr-Madan formula of ...
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Cross Currency Swap pricing
I have seen two methods for calculating the value of a xccy swap -
1) Convert the future foreign payments to the base currency using forward FX rates, net with the base currency payments and ...
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Equivalency of FX forwards and FX fixed for fixed swaps? Are they still the same under multiple curves environment?
I am encountering two approaches for valuation of FX swaps (fixed for fixed, e.g. fixed USD payments for fixed EUR payments) which seem to result into different values although in theory they should ...
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Is there any gamma in basis (i.e., floating for floating) interest rates swaps?
It is well known that vanilla fixed for floating swaps usually have a bit of gamma, but does a floating for floating (basis) swap have any? For the sake of simplicity, let's assume that both legs of ...
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Most relevant papers on IR / discount rate(s) modelling in the last 5 years
As the question states, what are some relevant recent papers I, as a non-expert, should read on IR modelling, products, and mechanics (that do not involve AI/ML)?
I think my knowledge on this topic ...
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How to calculate average entry price for perpetual swap contracts?
I'm trying to calculate the average entry price for perpetual swap contracts for use in back-testing a trading strategy, as per Bitmex's documentation:
A Perpetual Contract is a derivative product ...
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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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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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Plain Vanilla Interest Rate Swap
I'm trying to build an intuitive understanding of the following
The price of the replicating portfolio at time $t$ of the floating rate receiver is
$P_t^{swap}=P_{t,t_0}-P_{t,t_N}-\bar{R}\sum_{n=1}^...
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Question on Xccy swaps curve observability
Trying to get a sense of the following ...
In some emerging markets such as Argentina, there isn't any observable IRS swap curve, but only Xccy. I noticed in the place I work that FX NDF are used to ...
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Does value of a TRS only involve past price movement and not expected returns?
Is the value of a TRS just the difference between the "financing leg" (e.g. the side paying -IBOR plus spread) and "asset leg" (e.g. the side pay income and price changes), with of ...
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What curve are you shifting when you calculate DV01 for a swap?
I understand that a general swap has 4 curves attached to it: the flat forecast curve associated with the fixed leg, the forecast curve associated with the floating leg, the fixed leg discount curve ...
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