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The CDS spread costs you 11.7% in order to ensure that the holder gets the remaining 60% of principal and interest in return. In the end, the payment you are getting in default is 60%-11.7% = 48.3%. The CDS payment you would need to ensure you get the risk-free rate in both scenarios (90*1.03=92.7) is 12.3. Note: 105-12.3 = 92.7. Additionally, this would ...

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There are some slight inaccuracies in using term basis. You probably meant strategies which profit from carry/futures roll. There are a lot of variations of carry/roll strategies on different markets. I can point you to: 1/ FX carry - can be easily traded using futures 2/ Term structure/carry in commodities 3/ Term structure/carry in bond futures 4/ Term ...

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I would explain it slightly differently. The data shown indicates the market price of basis swaps. The spreads shown are to be added to the 3 mo libor leg of the basis swap. For example , the 5yr basis swap price is 3m libor minus 13bp versus 1m libor , and also 3m libor plus 14bp versus 6m libor. The spread is usually negative if you are swapping to a ...

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In the presented method we have one main tenor, which is 3M in the case of USD. The Adjustment is negative if we want to adjust a tenor shorter than 3M e.g. 1M. It is positive for greater tenors like 6M or 1Y.

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Let's say 1yr semiannual rate versus 6m Libor is 2.00% and 1yr basis swap is 6m libor = 3m libor + 15bp. Then , to a first approximation 1yr rate versus 3m libor is 2.00-0.15= 1.85%. More precisely , we have to take into account daycount conventions. So, we know that a swap consisting of 2.00% semiannual 30/360 daycount versus 3m libor +15 bp ...

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I don't endorse the belief that this is a credit concern. For banks operating a continual lending business they are less concerned with an isolated case of lending for 1M rather than 3M cause it is less risky. When then money from the 1M loan is repaid the money is relent so the existence of credit risk is always pertinent. However what you have is an ...

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First lets clear one thing up, 'basis' and 'spreads' are the same thing. Often this is called the 'basis spread'. This represents the difference between curves at different points in time. For example if from 1st Jan 2019: 6M (from 6M LIBOR cv) is 1.20% and 6M (from 3M LIBOR cv) is 1.10% then the 6M/3M basis on 1st Jan 2019 is 10bps. You have equivalent ...

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The results are the same as long as you use the same data and common interpolation methods. For instance 12M Libor vs fixed swaps are less liquid than 12M Libor vs 3M Libor basis swaps so one usually uses the latter to bootstrap the 12M projection curve (after the 3M projection curve has been bootstrapped). Also it is straightforward to see that for ...

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Convention for most currencies is flat compounding. This includes the most liquid G4 basis swaps: EUR 3m vs 6m, 3m vs 12m, 1m vs 3m USD 1m vs 3m, 3m vs 6m GBP 3m vs 6m, 1m vs 3m JPY 3m vs 6m, 1m vs 6m, 1m vs 3m Typically the spread is quoted in terms of the leg with the shorter tenor. Two notable exceptions are EONIA v 3m and the (relatively new) SOFR ...

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The Treasury Bond Basis: An in-Depth Analysis for Hedgers, Speculators, and Arbitrageurs by Galen Burghardt and Terry Belton is a good book on Treasury Futures.

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Reasons why the net basis might trade negative from time to time : 1) if a credit crisis occurs, investors do not have the resources to invest in the basis. For example , banks are unwilling or unable to provide repo financing. Or, investors do not have the cash required for the haircut on the repo financing. Hence the basis traded negative during the ...

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Say a US investor with 1mm USD wants to buy a 10Y Volkswagen bond in EUR priced at 100 EUR with a 5% coupon. First that investor needs to acquire EUR for purchase without exposing themselves to FX risk. To do this they execute a cross-currency swap. The investor will pay 1mm USD and receive say 1.1mm EUR with the agreed cashflows: he will receive USD 3M ...

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The change in the gross basis would simply be due to carry. You know the spot price of the bond. If you lock in term repo to the forward date, you will know your forward price. The difference between forward and spot price is your carry. Convert the carry to a daily value and this reflects the daily drop in gross basis. Put differently, if we assume last ...

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The expected change of basis over time will be equal to the change of $P_{bond}$ over time; this is because he change of $P_{futures}$ (as market estimate of delivery price) is expected to be zero (it is not subject to drift, all else being equal). For determining the change of $P_{bond}$, you would solve the first formula for $P_{bond}$, and besides ...

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PnL variability and risk reliability should not be a problem if you have well designed control (knot) points and enough data. See Darbyshire: Pricing and Trading Interest Rate Derivatives. I would advise trying to build the fundamental constructs, 1M and 3M for the following reasons; You probably have a better subjective opinion on the interpolation of ...

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This would be specified in the ISDA or term sheet. There are four alternative methods: No compounding: Meaning neither the rate nor the spread get compounded. Compounding: Meaning both the spread and the libor rate get compounded. Spread exclusive compounding:Meaning the libor get compounded but the spread does not. This was not covered by ISDA 2006 but ...

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Hope that give you an overview and helps you. In the financial crisis it can be seen on the difference between IBOR spot rates and OIS rates, which we will further refer to as the IBOR-OIS spread. As IBOR market quotes now involve the average credit and liquidity risk of the interbank money market, OIS rates have become the new proxy for the risk-free rate....

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Yes, you have a second order FX risk on the mark-to-market of your basis swap. However it is highly unlikely you will need to hedge it frequently.

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You are confusing the underlying index 3M Libor and a 6M loan that pays a compounded 3M interest. A 3M Libor is by definition the (average) rate on an interbank 3M loan. A 6M loan, regardless of its reference interest rate, is subject to counterparty risk up to 6M.

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