41 votes
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What is the Swap Curve?

Garabedian, Typically, the "swap curve" refers to an x-y chart of par swap rates plotted against their time to maturity. This is typically called the "par swap curve." Your second question, "how it ...
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23 votes

Difference between OIS Rate and Fed Funds Rate

The OIS represents the cost of repeated overnight unsecured lending over periods of up to two weeks (sometimes more). Whether it is secured or not depends on which of the overnight rates it is linked ...
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  • 2,069
16 votes
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Why using the swap curve as riskfree rate and no longer gov bonds?

I guess it depends on what they're referring to... The traditional swap curve (LIBOR-based) is certainly not risk free, as evidenced by the experience of the financial crisis and the resulting ...
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12 votes
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Why does the valuation of the floating leg of a swap only use the next payment?

The reason why you can price a swap without a model is because you can replicate the payoff using only zero-coupon bonds. For the fixed leg this is trivial. For the floating leg, at $T_0$ invest ...
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12 votes
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Use QuantLib Python to calculate Swap DV01

No, I'm afraid you're comparing apples with oranges. Your calculation of the DV01 of the swap is correct (with a caveat, see below), but the figure returned from ...
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12 votes

Swap curve construction

I think your question can be split into two parts: (i) how to value a swap mathematically and (ii) how swaps actually work as a traded product. Part (i): As noob2 pointed out, "theoretically"...
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  • 5,081
11 votes
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What is the difference between OIS Swap vs Basis Swap?

A Basis swap is a broad category of swaps where you exchange one floating rate against another floating rate. Without knowing the specific rates involved it is difficult to say more. An OIS Swap is ...
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  • 9,077
11 votes
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interest rate swap: PV01 vs DV01

In traditional terminology PV01 is 'present value of a basis point' and DV01 is 'dollar value of a basis point' which are technically only different in different currencies. Bloomberg has decided to ...
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8 votes
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Why are multiple custom curves (swap) built for one desk?

Chapter 1: Goldilocks is ousted by the bears Once upon a time, the banks used a fixing called LIBOR as a measure of the risk-free interest rate. Then the big hairy crisis came along and ate all our ...
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  • 3,589
8 votes

Carry calculation on an interest rate swap

I will attempt to summarise the content included in this book, which has a specific chapter dealing with carry and roll-down. There, two concepts are made completely separate. Costs-of-carry are ...
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8 votes
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SOFR Discount Curve Construction in Nov 2021

Fixed vs SOFR swaps for longer maturities are very liquid, since the interbank market trades these directly now, and these are the best instruments to construct the long end of the curve (2yr to 50yr)....
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7 votes
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Does an Interest Rate Swap has a Vega component?

There is no contradiction. If the strike of the floor and cap are both equal to the swap rate, and all accrual/payment frequencies, etc. are the same, then put-call partiy implies $$C_{t}-F_{t}=S_{t},...
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7 votes

Difference between OIS Rate and Fed Funds Rate

Secured and unsecured refers to lending. However OIS is a swap based on FF, not a loan. It is a different animal. So OIS is a derivative, or a bet, based on the average of future (unsecured) FF rates ...
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  • 9,462
7 votes

Carry calculation on an interest rate swap

It turns out that the two things are the same, appropriately scaled. Proof: we can construct a 5 year swap using 3 month libor combined with a 3mo-4.75yr forward swap, weighted by the dv01s of each ...
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7 votes
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Why are Interest Rate Swaps not valued using Monte Carlo Simulations?

Forward rates are determined from current spot rates bootstrapped from traded instruments. The reason is that if the forwards were different from the ones inferred from the spot rates, there would be ...
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6 votes
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Curve Euribor - Euribor 3M

It is incorrect to use 1m euribor or O/N euribor in a 6m Euribor forward curve. You should only use instruments based on 6M euribor, such as 1x7 FRA, 6x12 FRA or swaps v 6m Euribor, as you have done ...
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  • 304
6 votes

What is the correct convexity adjustment for an Interest Rate Swap with unnatural reset lag?

Consider a date sequence \begin{align*} 0 \leq t_0 \leq T_s < T_p < T_e, \end{align*} where $t_0$ is the valuation date, $T_s$ is the Libor start date, $T_p$ is the payment date, and $T_e$ is ...
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6 votes
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Swaption Trading

At most banks, swaption traders have models that allow non atm volatilities to be controlled by two parameters. Specifically , a parameter to control the smile (richness of out of the money options) ...
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6 votes

analytical formula for FV of fixed rate of a IRS

The key inputs to this calculation are two yield curves obtained from market data: $\{v_i\}$ the discounting factors (value today of \$1 received at time i) and $\{r_i\}$ the forecasting curve (...
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6 votes
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What is Dual Curve Bootstrapping? And how to do it, with an example?

A multi-curve means that you observe the discounting instruments (such as fed funds) and projection (libor, swap curve) and solve for all of them simultaneously; as opposed to bootstrapping separately ...
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6 votes

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

An Interest Rate Swap (IRS) normally refers a swap between a fixed rate and a floating rate. Floating rate being a single fixing for each accrual period and payment. An overnight indexed interest-rate ...
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6 votes

Interpolating Libor 9M rate?

It depends on what you want to do with the interpolated 9M rate. For example, I encountered this practical problem once. Desk loaned some money to an agricultural firm that, for liquidity reasons, ...
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5 votes

Basic question on LIBOR-OIS swap

Vol_smile. The sentence as you quote it doesn't make much sense, but my guess as to what they mean is this: OIS stands for Overnight Index Swap. In the US the overnight rate is called Fed Funds as '...
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  • 304
5 votes

How to build a cross currency swap pricer?

I recenlty worked on a similar problem and solved it with the help of Quantlib library. Assuming you are working with EUR and USD: get cross currency (xccy) swap data EUR / USD. You want to know how ...
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5 votes
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How were OIS discount curves built before long-term OIS were liquid?

The ois curves were (and still are) primarily build from adding together (a) interest rate swap rates and (b) Fed Funds/Libor basis swaps. For example, if 10yr swaps are 2.0%, and 10yr fF/libor is -...
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5 votes

Black and Normal Model for Caplet using Python

are you using the same volatility 20% for both black76 and Bachelier? The black76 is a lognormal model, where volatilities are quoted as relative price changes. The bachelier/normal model quotes ...
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  • 607
5 votes

Difference between FRA and a zero coupon swap

A forward rate agreement is an agreement to exchange a fixed for a floating rate over one period, with the payment being made at the start of the period. A zero coupon swap (with both legs paid at ...
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  • 5,628
5 votes
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Derivation of Swap rate formula

If $L$ and $Z$ curves are identical, you are in a single curve frame work. A swap can be seen as a long position in a fixed rate bond and a short position in a floating rate bond. (I'll use yearly ...
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  • 5,285
5 votes

Inflation swaps rate vs. Break-even rate

Yes, you could call this a liquidity effect. The 10yr breakeven rate is defined as the difference between the nominal yield of the 10yr Treasury and the real yield of the 10yr TIPS. The TIPS has ...
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5 votes
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Swap curve construction

I think I understand the question, but maybe not. In USD market, the most liquid IR swaps have floating leg reset quarterly from 3Mo LIBOR. (The fixed leg is semi-annual. Ths will change when LIBOR is ...
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