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
11
votes
Accepted
Why are FRA/futures convexity adjustments necessary?
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 ...
- 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
6
votes
US overnight swaps (OIS)
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 ...
- 16.6k
6
votes
Can you model the LIBOR rate as a geometric Brownian motion?
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 ...
- 2,187
4
votes
Accepted
Difference between ED futures and ZCB
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 ...
- 9,215
4
votes
Difference between OIS Rate and Fed Funds Rate
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 ...
- 41
4
votes
Accepted
12-month rate calculation for Problem 4.23 in Hull's Options, Futures, and Other Derivatives
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{...
- 520
4
votes
Accepted
Difference between US FED interest on reserve and EFFR?
According to https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210602a.htm , July 29, 2021, the previously separate interest rate on excess reserves and the interest rate on required ...
- 12k
3
votes
Accepted
Why is the formula for the 5y5y inflation swap forward on bloomberg 2*USSWIT10 Curncy-USSWIT5 Curncy
The standard method is 2*USSWIT10 - USSWIT5 which as you say, has no compounding. The compounded version that you attempted should be (1+USSWIT10)^2/((1+USSWIT5). If you experiment with actual ...
- 16.6k
2
votes
Accepted
How to change the Libor rate to Forward Libor rate in Swap?
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 ...
- 2,200
2
votes
Why do increasing spot rates have to be equal to or larger than the corresponding par rates?
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 ...
- 6,470
2
votes
Are forward rates for an IRS computed between reset dates or between start dates?
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 ...
- 9,215
2
votes
Real rates expectations
In the traditional framework, nominal yields represent expectations of nominal growth. If actual nominal > expected nominal, then the future share of pie will rise for savers versus consumers. If ...
- 5,041
2
votes
Accepted
Quantlib HW 1f model calibration not fitting to market normal vol quotes
You will need a time-dependent volatility function rather than a constant volatility, typically a piece-wise constant volatility function is used and can reproduce the swaption vols exactly (presuming ...
- 575
2
votes
How would I price out and set up a steepening yield curve strategy in which Im long 5yr UST and short 30yr UST futures
Not sure what you mean by pricing this trade since the price of a future is given by the exchange. You can get bond futures data for free from CME (TU is the symbol for the 2y and WN for the 30y). I’...
- 1,841
2
votes
Attribute P&L to PCA vectors (swaps)
Linear PnL is usually correctly estimated by the inner product of risks and market movements::
$$ Pnl = S \cdot \Delta r = S^T \Delta r$$
Where you apply a linear transformation to those risks to ...
- 9,215
1
vote
Attribute P&L to PCA vectors (swaps)
Back in the day, I used to do precisely this on a cross-asset basis. The critical point being that the correlations of any of your PCs to any other PC will be zero, else you will have miscalculated ...
- 5,041
1
vote
Euro short-term rate (€STR) question
It is an annual rate, with a Actual/360 day count so the interest paid on an overnight loan is -0.56%/360.
- 16.6k
1
vote
Accepted
How to interpret negative fixed rate in Vanilla IRS
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,...
- 16.6k
1
vote
Australian banks funding
I don't think that article is correct in the explanation.
The FX basis means the difference between the rate you would get from trading a spot vs forward fx trade versus just outright borrowing money.
...
- 2,588
1
vote
Banks' use of repo to finance operations
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 ...
- 2,588
1
vote
How are the notionals on proceeds-weighted bond butterflies calculated?
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 ...
- 16.6k
1
vote
Accepted
What happened to future price if rates become negative?
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....
- 2,588
1
vote
Accepted
Implementation of the Hull and White short rate model
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 ...
- 2,200
1
vote
Accepted
Can you determine USD swap rate movement probability from OTM swaption premiums?
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 ...
- 5,632
1
vote
Accepted
Interest rate model with external variables
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 ...
- 11.4k
1
vote
What does it mean to pay USD FRA-OIS?
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 ...
1
vote
When computing with rates, how long is a year? how long is a day?
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 ...
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