16
votes
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Why using the swap curve as riskfree rate and no longer gov bonds?
I guess it depends on what they're referring to... The traditional swap curve (LIBOR-based) is certainly not risk free, as evidenced by the experience of the financial crisis and the resulting ...
- 11.1k
13
votes
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Derivation of VIX Formula
The piece you are missing is an approximation via the Taylor formula of the logarithm:
$$\ln(1+x) \approx x-\frac{x^2}{2} \; .$$
Apply this to the first term in the final formula of the technical ...
- 1,497
12
votes
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Why does the valuation of the floating leg of a swap only use the next payment?
The reason why you can price a swap without a model is because you can replicate the payoff using only zero-coupon bonds.
For the fixed leg this is trivial.
For the floating leg,
at $T_0$ invest ...
- 3,876
12
votes
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What is the difference between OIS Swap vs Basis Swap?
A Basis swap is a broad category of swaps where you exchange one floating rate against another floating rate. Without knowing the specific rates involved it is difficult to say more.
An OIS Swap is ...
- 9,212
12
votes
Swap curve construction
I think your question can be split into two parts: (i) how to value a swap mathematically and (ii) how swaps actually work as a traded product.
Part (i):
As noob2 pointed out, "theoretically"...
- 5,513
9
votes
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Why do FX Swaps have Interest Rate Risk?
An FX Swap can be described as "borrowing in one currency and lending in another". When put this way it is clear that it has something to do with interest rates in the two currencies. You will be very ...
- 9,212
9
votes
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Difference between 5Y breakeven inflation and 5Y5Y inflation forward?
I downvoted because I think the FED is very detailed in their documentation. The definition of a forward is a very basic financial question that a bit of google search can answer and not a quant ...
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8
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Why is a variance swap long skew?
As I've mentioned in a comment, it would be wrong to think that entering a variance swap specifically amounts to being "long skew".
What you can say however is that, in the absence of jumps (i.e. in ...
- 14.3k
8
votes
Why is a variance swap long skew?
If you take Quantuple's stuff a little further, you can really see whether you're long skew. You can pretty easily see the dependence on convexity too (though it should be obvious that you're long ...
- 2,481
8
votes
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Spot/Next and Tom/Next FX forward swaps
Let’s say the settlement period is T+2, and you made a deal on the 8/10/2018. The spot date would be 10/10/2018 (assuming no holidays!), that’s when the physical exchange would happen. Now if you don’...
- 6,104
7
votes
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Does an Interest Rate Swap has a Vega component?
There is no contradiction.
If the strike of the floor and cap are both equal to the swap rate, and all accrual/payment frequencies, etc. are the same, then put-call partiy implies
$$C_{t}-F_{t}=S_{t},...
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7
votes
Why is CSA currency OIS rate used in discounting instead of local currency OIS?
The problem here is that your market is not arbitrage-free:
JPY OIS = 10% per day, flat
USD OIS = 0% per day, flat
USDJPY spot = 100
USDJPY Forward for tomorrow = 100
A quick sense check ...
- 487
7
votes
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What is a Constant Maturity Swap (CMS) rate?
A constant maturity swap (CMS) rate for a given tenor is referenced as a point on the Swap curve. A swap curve itself is a term structure wherein every point on the curve is the effective par swap ...
7
votes
Downward Sloping Swap Spread Curve
If I look at the market I think this is mainly driven by the very nature of the long end investors of the swap curve. Compared to govi curves the swap curves provides a much better liquidity in longer ...
- 1,648
6
votes
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Quantlib bootstraping fails on 5y swap
You're not the first to trip on this, and unfortunately the fact that the provided example is from a different era doesn't help.
Quite simply, you're not writing rates correctly. The 5-years swap ...
- 5,988
6
votes
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Why QuantLib computes the fixed-leg swap rate by this formula?
fixedLegBPS is the basis-point sensitivity of the fixed leg, that is, how much its NPV changes when the fixed rate changes by one basis point: it's calculated as ...
- 5,988
6
votes
What is a Constant Maturity Swap (CMS) rate?
In simple terms: An ordinary swap might be a 10 year swap of Libor vs a fixed rate; this fixed rate is determined in the marketplace every day and is published by Reuters, Bloomberg etc. as the '10 ...
- 9,212
6
votes
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Swaption Trading
At most banks, swaption traders have models that allow non atm volatilities to be controlled by two parameters. Specifically , a parameter to control the smile (richness of out of the money options) ...
- 15.2k
6
votes
Discount curve and payment frequency
Better yet, don't use LIBOR for discounting at all.
Since LIBOR involves credit spread over the risk free rate, using LIBOR for discounting would adjust the deal's market value to reflect some amount ...
- 61
6
votes
analytical formula for FV of fixed rate of a IRS
The key inputs to this calculation are two yield curves obtained from market data: $\{v_i\}$ the discounting factors (value today of \$1 received at time i) and $\{r_i\}$ the forecasting curve (...
- 8,207
6
votes
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Question on Xccy swaps curve observability
In Argentina (and a few other emerging markets), a cross-currency swap is somewhat liquid (much less so than in was before the most recent sovereign default).
You can find someone to trade 2 year ...
- 10.9k
5
votes
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Convexity adjustment
I have traded those convexity adjustments for many years. Any decent model of these adjustments allows the user to vary the correlation as they please, rather than assuming something. If it is of ...
- 15.2k
5
votes
What is a Constant Maturity Swap (CMS) rate?
In a vanilla swap, the IR on the floating leg usually depends on the reset period/swap frequency. If frequency is 6m, 6m LIBOR is used for reset, 3m LIBOR for quarterly resets etc. In a floating CMS ...
- 51
5
votes
How to build a cross currency swap pricer?
I recenlty worked on a similar problem and solved it with the help of Quantlib library.
Assuming you are working with EUR and USD:
get cross currency (xccy) swap data EUR / USD. You want to know how
...
- 121
5
votes
Why would one prefer variance swaps over other instruments?
The vega of an option is very dependent on the spot price. The vega of a variance or volatility swap is not.
- 6,823
5
votes
Why do FX Swaps have Interest Rate Risk?
Looking at the swap as a series of forwards, considering then that the arbitrage-free FX forward depends (via the so called interest rate parity) both on the FX spot and the interest rates for the ...
- 1,287
5
votes
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How were OIS discount curves built before long-term OIS were liquid?
The ois curves were (and still are) primarily build from adding together (a) interest rate swap rates and (b) Fed Funds/Libor basis swaps. For example, if 10yr swaps are 2.0%, and 10yr fF/libor is -...
- 15.2k
5
votes
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Swap contract comparative advantage
It is actually rather simple.
Lets start with the fixed rate market. A can borrow at 5% while B can borrow at 7%. Simply said, A has a comparative advantage of 2% in the fixed rate market.
In the ...
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5
votes
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What curve are you shifting when you calculate DV01 for a swap?
Let's step back and look at the reason for making a DV01 calculation first before answering the question;
The reason for making a DV01 calculation is to quantify what market movements has impact on ...
- 86
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 ...
- 5,718
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