7
votes
Accepted
Two different ways of pricing that leads to two answers
$$\frac{1}{(1+r_{02})^2} = E\left(\frac{1}{1+r_{12}}\right)\frac{1}{1+r_{01}}$$
Indeed, in the pricing measure, the distribution of $r_{12}$ has to be such that this relation holds.
If you look at ...
- 6,843
6
votes
Accepted
Bootstrapping OIS curve
I see several problems that might explain those differences:
The frequency of the fixed leg on a EONIA swap is Annual and not semi
The deposit facility rate is not part of the EONIA curve. Use the ...
- 5,535
6
votes
Accepted
Half of the bid-ask spread as transaction cost
The idea of assuming that the transaction cost is one half of the bid-offer spread comes from several assumptions:
the positions are marked-to-market at mid;
you can actually execute at bid or ask (...
- 11.3k
5
votes
Accepted
Riccati Equation in spot rate model
As you noted, this is a Riccati type ODE and it can thus be simplified using the standard transformations for this class - see e.g. Wikipedia. We start by defining
\begin{equation}
C(t, T) = \frac{1}{...
- 5,911
5
votes
Accepted
For which would you expect the liquidity on instrument X to be the greatest: its spot, future, option or swap?
Completely depends on the asset class.
For currencies (including GBP/USD) the spot market is an order of magnitude more liquid than forwards, futures or options. However, some currencies with trading ...
- 5,778
4
votes
Accepted
FX spot distribution with student-t returns
1. Theory
The Student $t$ distribution does not exhibit a moment generating function
$$
M_X(t)=\mathbb{E}\left(e^{tX} \right)
$$
Hence, there exist no closed form solution for $M_X(t=1)=\mathbb{E}\...
- 6,195
4
votes
Two different ways of pricing that leads to two answers
There is no conflict here. In the identity,
\begin{align*}
\frac{1}{(1+r_{02})^2} = E\left(\frac{1}{1+r_{12}}\right)\frac{1}{1+r_{01}},
\end{align*}
the expectation is under the year-1 forward measure....
- 20.8k
4
votes
Structured product sellers and div swaps
To add to the above on a more practical note:
In general, SP desks make money on the individual product when the underlying declines. Dividends make the underlying decline, hence they are naturally ...
- 161
4
votes
Accepted
Structured product sellers and div swaps
The paper is generally correct, but it is not a general statement, as in a general truth of options hedging in a theoretical context, rather a statement regarding how the structured derivs market is ...
- 1,346
4
votes
Accepted
What is the consensus interpretation of index future dealer gamma?
If dealers are short gamma, as you say, the client base is long gamma. The explanation for this will not always be the same, but here’s a few possibilities
client base has bought a lot of puts to ...
- 15.5k
4
votes
Understanding FX forward points and market usage
There are two relevant sections on the help page, the direct links (e.g. if you have it in an IB) look like this:
{LPHP FRD:0:1 2898067 }:
ON ("Overnight"), TN ("Tomorrow-Next"), ...
- 6,869
3
votes
Is LIBOR a spot rate?
First question can't be answered without knowing what you are discounting.
Second question you are asking whether the rate of a 16 day interbank loan can be obtained from interpolating an overnight ...
- 15.5k
3
votes
Predicting the Future FX Spot Rates
It is very difficult to outperform the "random walk without drift" benchmark. The forward rate is not a particularly good predictor as it is often biased.
Nevertheless some economists claim it is ...
- 9,222
3
votes
Accepted
Can I use spot rates bootstrapped from a swap curve to price a bond?
The general - and short - answer would be no: Except for some hypothetical cases, unless you have a convincing model for the residual spread-over-swap, you cannot use swaps to value your bond.
Quick ...
- 6,195
2
votes
Predicting the Future FX Spot Rates
You could compare 3 month fx forward points versus realised 3 month fx differentials to see if interest rate differentials are a good predictor. I looked at a 1 year horizon and concluded that you ...
- 61
2
votes
Implication of Humped Spot Curve on future spot curve(s)
The forwards and the spot rates will be decreasing, that is correct.
- 262
2
votes
Accepted
Total return of a bond using spot rates
Hopefully clear from the table below. On the left, the NPV of the bond today is 111.2199, exactly as you say. On the right is the same for 12 months time, after the payment of the first coupon.
- 4,991
2
votes
Accepted
Spot-Forward Relationship - Proof
Let's go for a detailed and rigorous proof.
Let us define our local currency $Y$ as the numéraire, i.e. the asset in terms of whose price the relative prices of all other tradeables are expressed. $X$...
- 624
2
votes
Accepted
Implied AUD Interest Rate from USDAUD FX Swap and USD Interest Rate
The reason for the bid and ask twisting is that you can think of a long AUD forward as three transactions:
Borrow USD
Sell USD, buy AUD spot
Lend AUD
As a result, there are three sources of bid/...
- 499
2
votes
Accepted
Determine forward rates for EUR/USD
The ESTR rate should be -0.585 and not 0.585. Converting to monthly form by dividing by 12 and using the CIP formula gives:
$$F=\frac{1+0.0029/12}{1-0.00585/12}\times 1.0810 =1.0818$$
or 8 forward ...
- 1,377
2
votes
Relationship between simple Libor spot and forward rates
USD Libor rates are quoted on a Act/360 basis. You can determine USD Libor forward rates by application of the following formula.
$$ (1 + \text{SpotRate}(t) \times (\text{Act}(0,t)/360)) \times (1 + \...
- 5,652
1
vote
Reliable weekend forex source that can act as credible data for Monday APAC morning forex trade
As others have mentioned, the conventional answer is 'no'.
However, here is one interesting angle of the new cryptocurrency trading market to me - it operates 24/7/365 (yes even Christmas day!). Now I'...
- 2,906
1
vote
Reliable weekend forex source that can act as credible data for Monday APAC morning forex trade
Well it depends on what pairs you want data for. But in general, no. Even if you can see intraday data in those 'dead' times, the quotes can be very stale (hours old).
- 611
1
vote
Spot rate investment horizon
The confusion arises because “spot” is variousLy used in FX, equities and commodities to refer to the immediate/very-short-term price (before any forward adjustments for interest rates, dividends, ...
- 4,991
1
vote
Accepted
Pricing IRS: bootstrapping zero rate (spot rate) from the swap curve
It seems you are using the same curve for forward and discounting.
The EUR Vanilla Swaps vs 6M actually have yearly payments, so to obtain the discount factors, and after having the DF for year 1, ...
- 5,535
1
vote
Spot Rates on Treasuries
Yes you can access spot rates on the Treasury website here:
https://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Pages/TNC-YC.aspx
https://www.treasury.gov/resource-center/data-...
- 141
1
vote
Accepted
Why do par-yield shifts grow faster across the curve than spot-rate shifts when looking at key-rates?
Intuitively, this is the "coupon effect" at work – when the yield curve is upward sloping, lower coupon bonds have higher yield and their yields move up more when the overall curve shifts up (all else ...
- 11.2k
1
vote
Structured product sellers and div swaps
Just to add a remark on top of Ivan’s excellent answer, note that the core reason IB package those KI puts in the autocallables and other SP for investors is not just in order to make the coupons more ...
- 2,157
1
vote
Calculating theoretical spot rates of treasury bonds beginning with treasury bills
The question really is what is the discount factor for a payment in one year assuming semiannual compounding? Because then your present value is simply 1.75 times this discount factor.
If you have $k$...
- 15k
1
vote
Units of measurement for Minimum Variance Hedge Ratio
Since SD in this case is usually the 1-day difference of log prices (i.e. 1-day returns) and corr is a dimensionless number, you shouldn't have to keep the units the same. After all that's how you're ...
- 29
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