7 votes
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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 ...
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  • 6,763
5 votes
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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 ...
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  • 5,335
5 votes
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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 ...
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  • 5,628
5 votes
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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}{...
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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....
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  • 20.5k
4 votes

forward vs spot simply-compounded spot interest rate

The flaw is $L(T,S)$ is a future spot rate that is determined at time $T>t$ and unknown at present. It is correct that $$F(t,T,S)=\frac{1}{S-T}\left[\frac{P(t,T)}{P(t,S)}-1\right] \iff P(t,S)(S-...
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  • 3,365
4 votes
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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 ...
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  • 1,356
4 votes
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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 (...
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4 votes
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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}\...
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  • 5,783
4 votes
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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 ...
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  • 14.1k
3 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 ...
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  • 151
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 ...
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  • 14.1k
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 ...
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  • 9,107
3 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"), ...
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  • 4,748
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 ...
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  • 61
2 votes
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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/...
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2 votes
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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.
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2 votes
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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 ...
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  • 1,367
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'...
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  • 2,856
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).
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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, ...
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  • 4,926
1 vote
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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, ...
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  • 5,335
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-...
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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 $k$...
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  • 13.9k
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 ...
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  • 29
1 vote

Calculating spot rates from forward rates

If you want to calculate the forward rate given semi-annual compounding then the answer should be: \begin{equation} F(0,t_a,t_b)=\Bigg(\sqrt[2*(t_b-t_a)]{\frac{(1 + \frac{r_b}{2})^{2*t_b}}{(1 + \...
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1 vote

Calculating spot rates from forward rates

Forward Rate = $\frac {(1+(0.5) 2\%)^{2 * 2}} {(1+(0.5) 1\%)^{2 *1}} -1$ The above works fine when the day count convention is 30/360. General formula - $F(t,t+1,t+2)= \frac {P(t,t+1) - P(t,t+2)} {...
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  • 948
1 vote
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Generalization of Macaulay/modified duration under non-parallel shift of spot curve

When you want to consider arbitrary (i.e. non parallel) movements of the yield curve, the duration ( a scalar) is replaced by a vector of 'key rate durations' one for each maturity you wish to ...
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  • 9,107
1 vote
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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 ...
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  • 10.9k
1 vote
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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. $X$...
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