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What is the Swap Curve?

Garabedian, Typically, the "swap curve" refers to an x-y chart of par swap rates plotted against their time to maturity. This is typically called the "par swap curve." Your second question, "how it ...
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16 votes
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Deriving Interest Rates

There are two parts to your question and I'd like to answer them separately. Curve Construction On a daily basis, you can observe prices on a large variety of instruments, whose prices are driven by ...
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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 ...
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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 ...
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12 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 ...
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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"...
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11 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 ...
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10 votes

Why is USD LIBOR used for USD denominated securities?

Why does USD based security valuation have to give a thing about what London Banks think? Your question is based on false premises: the USD Libor is not determined by polling London based banks as ...
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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 votes
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Is this an inconsistency between Swap and LIBOR?

Firstly, understand that the 1y Libor is not useful here; the swap is 2 6-month periods, which will each fix on 6m Libor. These days, the *ibor fixings at different tenors are essentially separate, ...
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8 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 ...
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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 ...
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8 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 ...
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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’...
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7 votes
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Why is USD LIBOR used for USD denominated securities?

The importance here is that it actually does not matter in what time zone or market the libor rates are set. Key is that it is supposed (!!!) to be a gauge at what rate contributing banks could borrow ...
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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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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 ...
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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 ...
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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 ...
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6 votes
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Curve Euribor - Euribor 3M

It is incorrect to use 1m euribor or O/N euribor in a 6m Euribor forward curve. You should only use instruments based on 6M euribor, such as 1x7 FRA, 6x12 FRA or swaps v 6m Euribor, as you have done ...
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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 ...
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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 ...
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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 ...
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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) ...
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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 ...
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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 (...
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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 ...
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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 ...
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5 votes

How do insurance companies use interest-rate swaps?

Swaps are used for hedging purposes against directional rates movements (insurance companies hold loads of fixed income instruments and are thus hugely exposed to overall rate levels, depending on ...
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5 votes

Why is "full" Yield Curve (term structure of interest rates) 3 component based?

@Arrigo's answers are quite good; I'll try to beef up his points a bit more. Yield curves should be constructed using instruments of similar credit risks. If you're building a US Treasury yield curve,...
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