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19

The OIS is not the secured (collateralised) lending rate. It represents the cost of repeated overnight unsecured lending over periods of up to two weeks (sometimes more). Because it is based on overnight lending, it is assumed to have a lower credit risk than longer term interbank loans based on say 1M, 2M or 3M Libor and this is what drivers the OIS-Libor ...


8

This has been posted a few times now, so I will invest the time on a full response. FRA / Futures convexity has nothing to do with profits/losses being immediately recognised on the future through margin settlement, and potential reinvestment, whilst deferred on the FRA. Although the opposite seems to be a very common belief amongst many practitioners (...


6

Well, OIS is actually a style of swap, based on overnight rates. It could have a Fed Funds or a SOFR underlying rate, or anything else. Up until recently , it was assumed in common parlance that OIS meant Fed Funds, but we do hear nowadays of OIS style SOFR swaps.


6

It is not reasonable because rates display a stationarity but brownian motion is not stationary. The variance of libor at a future time $t>0$ conditional on the value at time $t=0$ does not scale as $\sqrt{t}$


4

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 over a period.. For example my name is Noob Rademayer, I am not a bank so I can't lend or borrow FF in the interbank market, but I can bet on the rate at ...


4

The rate is the return on your investment. Since you'll receive 100\$ after 12 months, $\frac{100 - P}{P} = \frac{100 - 89.0}{89.0} = \frac{11}{89} = 12.36 \%$. Same for the 6-month T-Bill: $\frac{100 - P}{P} = \frac{100 - 94.0}{94.0} = \frac{6}{94} = 6.38 \%$.


3

The fixed leg of the OIS is an unsecured rate that is very close to Risk Free Rate (RFR) because of the combination of several reasons: it is akin to a money market term deposit rate swapped against overnight deposit rates, compounded geometrically over the swap lifespan, so a net expected present value at inception of zero (Feynman-Kac) should reflect ...


3

In general futures contracts are leverage instruments. They never require the investment of principal. They do however require margin: you need to fund your account at a futures exchange so that they have insurance against any losses you incur, as an example this might be 2 days standard volatility. On 1 ED contract for 5bps a day thats probably 10bps margin ...


2

Strictly speaking, any risk-free interest rate can be composed into three components: The rate expectations component is the market's "true" expectation for future interest rate. A bond risk premium component: longer maturity bonds have higher duration risk than cash. Accordingly market participants will demand more compensation for taking on duration risk;...


2

General fact: From a mathematical standpoint, we can write the PV of a flow to be received at $T$ as the value of its expectation under the $T$-forward measure (which is also the value of the forward at $t$: $F(t, T)$) discounted using the zero-coupon bond. We can show this by changing measures from the risk-neutral measure $\mathbb{Q}$ to the $T$-forward ...


2

For IRS schedules there are the following different sets of dates: Payment dates: the dates on which cashflows are exchanged. Accrual dates: these dates define how much interest is accrued (given a specific rate either fixed or floating) Reset/Fixing dates: this is the date a floating rate publication is actually calculated and made public, i.e. displayed ...


1

You have it right. Fixed rate payer pays -0.35% and receives Euribor. This means the fixed rate payer receives 0.35% and receives Euribor. This is not the same as receiving 0.35% and paying Euribor, because the euribor flow is reversed in the latter trade.


1

First of all, banks play it both ways. Some banks (JPM especially) are cash-rich and will use their cash (pay depositors 0.00 %) to pick up revenue in the repo markets. Other banks will use the cash from repo to fund other types of repos. For example, in their prime services business they might be able to do a securted loan to clients for LIBOR +50. Banks ...


1

It is an annual rate, with a Actual/360 day count so the interest paid on an overnight loan is -0.56%/360.


1

To answer this question, we must fix a bit of the vocabulary, first. I will try to stick as close as possible to your conventions: Spot rate: (also called zero rate) is the annualised rate of return on a non-coupon-bearing bond (hence zero coupon bond). For a given maturity $t$, let us call $r_t$ the corresponding spot rate, i.e. we have $$ PV_0(t)=\left(\...


1

I believe the duration constraint and the proceeds constraint are not self consistent. You cannot satisfy both. The duration constraint alone fixes $N_1/N_2$ and $N_3/N_2$, so you cannot also satisfy the proceeds constraint.


1

Futures actually have a negative basis all the time without having to have negative interest rates. Dividends can have a rate that is higher than the interest rate and that makes the basis negative. Futures on the Dow Jones Real Estate Index are almost always negative. Here are the DJUSRE Sep and Dec futures. The "Spread" column shows you the negative ...


1

When you call ql.FlatForward it simply means you are constructing a rate curve that will lead to flat forward rates. The constructor of this curve takes the forward rate as an input. If you want to change the input (say, because the market moved and forward value changed), then you can change the quote value with the new value like this. First, keep a ...


1

As for any European vanilla option you can infer the cumulative distribution function under the pricing measure by taking the derivative w.r.t. strike. In the case of European swaptions the natural numeraire is the annuity $A(t)$, the pricing measure is the annuity probability measure $P^A$, and $$ \text{receiver swaption premium} = A(0) E^A[(K - S_T)^+] $...


1

These models do exist. They are known as "macro-finance" models. From "Macro-Finance Models of Interest Rates and the Economy": During the past decade, much new research has combined elements of finance, monetary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I ...


1

I think I've found the answer in another forum (which fits my initial intuition). So just to share: FRA-OIS is traded via swap. So if you think the spread would widen you pay on the swap. So you would pay OIS + Spread and receive Libor. https://www.wallstreetoasis.com/forums/tech-questions-on-eurodollar-and-fed-funds-futures-hedging


1

When the convention is ACT/360, it means that 365 calendar days of interest is calculated as 365/360 years. I knows it seems stupid, but before industrial use of computers, it was convenient for a year to be a nice round number like 360. I forget how the 30/360 convention is handled - I once coded up all the conventions, but they have worked really well ...


1

The 1x4 FRA rate is where you can lock in 3 mo libor , 1 mo from now. To construct this rate , you must build a 3 mo libor curve. The first point in this curve is 0x3 libor , which is spot 3 mo libor. The next point on this curve is the next Eurodollar futures contract. These expire every month on the third Wednesday. Then you have to interpolate ...


1

The 1x4 FRA rate is given by $F(1,4) = \frac{12}{3} \left(\frac{(1+ 4/12 \times L(4))}{(1+ 1/12 \times L(1))}-1 \right)$ where $L(T)$ is the $T$-month Libor rate seen today. Clearly $F(1,4)$ depends on the 1M and 4M LIBOR rates. So if the market 1M rate $L(1)$ is below the market 3M rate $L(3)$ you will be understating the true FRA rate if you set $L(1)...


1

Here you go. On Page 935 "A.4. Global Government Bonds Bond index returns come from Bloomberg and Morgan Markets, short rates and 10-year government bond yields are from Bloomberg, and inflation forecasts are obtained from investment bank analysts’ estimates as compiled by Consensus Economics. We obtain government bond data for the following 10 ...


1

Do you want to model the returns in a risk-neutral framework (for derivatives) or in the real world measure (for risk analysis/portfolio construction)? For the first approach (say modelling under $Q$) you should go to the literature on bond and FX-derivatives. I would go more into detail if this is your aim. The formulation $N(\mu-\sigma^2/2,\sigma)$ ...


1

1) JPY yield curve is currently upward sloping, not inverted... 2) Empirically, an upward sloping yield curve predicts recessions, not an inverted one. See this famous paper http://newyorkfed.org/research/current_issues/ci2-7.pdf


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