25
votes
Difference between OIS Rate and Fed Funds Rate
Since the financial crisis of 2008-9, banks have become less willing to lend to each other for periods of more than one day. They prefer to lend `overnight', and must do this at the overnight (O/N) ...
- 2,137
15
votes
Accepted
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 might technically only different in different currencies. I have also seen it ...
- 9,215
13
votes
Accepted
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 ...
- 3,936
12
votes
Accepted
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 ...
- 9,332
12
votes
Accepted
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 ...
- 7,003
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"...
- 5,998
10
votes
Accepted
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)....
- 16.6k
9
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 ...
- 16.6k
9
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 ...
- 9,215
8
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 ...
- 10.9k
8
votes
Accepted
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 ...
- 5,685
7
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 ...
- 21k
6
votes
Accepted
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) ...
- 16.6k
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 (...
- 9,215
6
votes
Accepted
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 ...
- 5,685
6
votes
Accepted
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 ...
- 12k
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 ...
- 5,685
6
votes
Accepted
Transition to SOFR Swaps and single curve pricing
I think the question was about dual curve stripping.
As much as I know, the market is using SOFR discounting for all sorts of quotations now. For example, swaption vol is quoted with SOFR discounting, ...
- 8,143
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, ...
- 12k
6
votes
Accepted
USD swaps trading post LIBOR: the current state of the world (January 2022)
The Commodity Futures Trading Commission’s Market Risk Advisory Committee (CFT MRAC) went ahead with a 4-phase program in 2021 called "SOFR First": the four phases relate to linear IRS, ...
- 5,998
6
votes
BLOOMBERG Strike vs Straddle Volatility
Generally, best to ask the help desk (F1F1) for simple questions like this.
See help VCUB {LPHP VCUB:0:1 2824936 <GO>}:
Cube Options: Allow you to display or ...
- 8,143
6
votes
Accepted
Use of interest rate swaps in liability-driven investing
Based on a Bloomberg article by Matt Levine, this is how it works:
Pension funds have long-term liabilities: say a liability of £100 in 30 years from now. This liability will have a net present value, ...
- 5,998
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
...
- 121
5
votes
Accepted
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 -...
- 16.6k
5
votes
formula for physical DV01 of interest rate swap
There are two items that must be clarified with respect to your question:
Are you assuming an interest rate swap (IRS) at mid-market, i.e. at-the-money (ATM) or an off-market IRS with some unknown ...
- 9,215
5
votes
Mid-curve swaption
You can only infer forward vol by pairing a mid-curve option with a spot option. It's easier to go through an example (I'll use 5y x 5y vol since I have the sketch below handy...) One decomposition of ...
- 11.4k
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 ...
- 622
5
votes
Why does the ultra long-end of a yield curve invert?
I would not say that this is universally acknowledged but here is my view:
Instead of considering par rates, i.e. 10Y and 20Y, consider forward rates, such as 10y and 10y10y. The useful difference ...
- 9,215
5
votes
Why does the ultra long-end of a yield curve invert?
Suppose 40yr bond and 30yr bond have the same yield. It is a mathematical fact as @attack68 has pointed out, that the convexity of the 40yr is greater than the convexity of the 30yr bond. So ...
- 16.6k
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 ...
- 5,891
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