13
votes
Accepted
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 ...
13
votes
Accepted
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 ...
12
votes
Accepted
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 ...
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"...
10
votes
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 ...
9
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 ...
9
votes
Accepted
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
votes
Accepted
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 ...
9
votes
Accepted
How to Bloomberg compute the implied Yield ? What is FX swap basis spread?
1 ) The value 1.062732 is the Forward outright as quoted on FRD. Your pricing source is BGN (Bloomberg Generic New York). That ...
8
votes
Accepted
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 ...
8
votes
Accepted
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’...
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 ...
7
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 ...
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 ...
6
votes
Accepted
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 ...
6
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 ...
6
votes
Accepted
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) ...
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 ...
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 (...
6
votes
What does **Long Call EURUSD** mean?
First please keep in mind that EUR (and GBP) are quoted "cable". So if the USD EUR exchange rate is quoted as 1.1, for example, that means that (quotation or countercurrency) USD 1.1 = (base currency)...
6
votes
Accepted
3M curve vs 6M Curve, which one to use for valuation of IR Derivatrives
You use the curve that describes the floating rate index to estimate the floating rate cashflows, a swap against floating 3M uses a 3M curve to forecast the cashflows.
And then you use a discounting ...
6
votes
Accepted
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 ...
5
votes
Accepted
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 ...
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
...
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.
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 ...
5
votes
Accepted
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 -...
5
votes
formula for physical DV01 of interest rate swap
There are two items that must be clarified with respect to your question:
Are you assuming an interest rate swap (IRS) at mid-market, i.e. at-the-money (ATM) or an off-market IRS with some unknown ...
5
votes
Accepted
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 ...
5
votes
Accepted
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 ...
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