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Question 1 I often read by research desk that ASW-spread have widened or tighten without concrete reference to the bond. As said above, the asset swap spread depends on the credit quality of the swapped bond. So is there a market standard for this? If people talk about USD, do they mean swapped Treasuries, in EUR swapped bunds?
Which research papers, credit ...
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Simple example: euro based investor wants to buy a USTreasury, currency hedged back into Euro. Investor executes the following 2 trades at t=0:
purchase Treasuries for next day settle. Assume usd12mm purchase price.
execute fx swap with cashflows at t=0 : receive usd12mm/pay €10mm and cashflow at t=1yr : pay usd12.0mm/ Rec €9.9mm. (I used spot =1.20 and ...
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I feel that it depends on who's writing the research, and on their personal idiosyncratic preferences.
For example, picking a random credit research piece, we see
Asset-swap spreads in the secondary market widened modestly by 1.3bp
and another random piece from the same team:
Asset-swap spreads widened significantly at the beginning of March across ...
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Let me add a couple of points.
Question 1: in my experience, ASW spread always refers to the spread between a particular Bond and the IRS of the same currency. Most commonly, this would be a spread between government bond and the corresponding IRS.
In a par-par ASW, you trade a fixed notional (say 500 million USD), whereby you swap the fixed cash-flow on the ...
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Try $f_0=-0.9975, f_1=2.9975, f_2=-3, f_3=1$. This should have 3i IRRs, namely -5%, 0 and 5% with the desired behavior between about -3% and +3%.
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There is no closed-form solution, but solving for $r^\star$ such that
$$f(r^\star) = \tilde{c}^{-1} $$
should be fast and safe with a standard single dimension solver, bisection or Newton-Raphson, as
function $f$ is monotonically decreasing ($B_i$'s and $\tilde{c}_i$ are positive),
$$f(x) = \sum_{i=1}^n \tilde{c}_i {\rm e}^{A_i-B_ix}, $$
its derivative is ...
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The futures/forward convexity adjustment comes from the covariance between rates and the index. For a future/forward that settles on an index $I_T$ on expiry $T$ the future price is $F_{\text{fut}} = \mathbb{E}^{\mathbb{P}}\left[I_T \right]$, where $\mathbb{P}$ is the risk neutral measure, and the forward price is $F_{\text{fwd}} = \mathbb{E}^{\mathbb{Q}^T}\...
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Just adding my two cents. Without taking the logarithm of the price, the Ito's Lemma should result in:
$d p(t,T) = \left( \partial_t A(t,T) - \partial_t B(t,T) r + \frac{1}{2}\sigma^2B(t,T)^2 \right)p(t,T) dt - B(t,T) p(t,T) dr_t$
substituting now the partial derivatives and the differential $dr_t$, and simplifying the identical terms:
$d p(t,T) = r_t p(t,T) ...
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You can simply use Ito's lemma under the risk neutral measure $Q$.For the log-bond price $p(t,T)$ this gives
$$dp(t,T)=(A_t(t,T)-B_t(t,T)r_t)dt-B(t,T)dr_t$$
$$=[A_t(t,T)-(B_t(t,T)+B(t,T)a)r_t]dt-B(t,T)\sigma dW_t$$
Here $A_t(t,T)$ and $B_t(t,T)$ are partial derivatives wrt $t$ and $W_t$ is Wiener process under $Q$.
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Given the non-linear nature of the constrained optimization problem ie. $exp(A(T0,Ti)-B(T0,Ti)*r)$, you will need to employ numerical solvers.
The authors of the document used Simulated Annealing (shown in Appendix B) for fast convergence. They note that it could take up to 10 seconds to solve a 10-dimensional parameter space.
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The futures/forward convexity adjustment for non-interest rate futures only tends to matter for futures with maturities greater than a year (which tend to be part of bespoke structures and not traded in size on screen). You can get a closed form solution in a GBM-Ho-Lee hybrid model if you don't mind grinding though some partial differential equation work ...
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I guess by "research desk" you mean a division at e.g. an investment bank and not academic research. To give others an impression of the credit market, practioners do not speak about one individual bond spread, they speak more generally about spreadS, meaning e.g. the EUR IG corporate bond market as a whole.
The (credit) spread is a risk ...
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