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 ...
- 1,527
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"...
- 6,308
10
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 ...
- 9,384
10
votes
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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 ...
- 9,384
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 ...
- 9,402
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’...
- 6,222
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 ...
- 527
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 ...
- 1,738
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 ...
- 61
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) ...
- 17.5k
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 (...
- 11.2k
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)...
- 12.7k
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 ...
- 11.2k
6
votes
Cross Currency Swap Attribution
As for the book, the best one I have come across is Pricing and Trading Interest Rate Derivatives by Darbyshire, although it's a bit pricey (indeed as most finance books are) (https://www.amazon.com/...
- 6,308
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 ...
- 12.7k
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 ...
- 1,422
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
Valuation of a swap where both parties can cancel (not settle at market) with accrual method instead of present-value?
Any time that a contract is cancellable by either party, it will be cancelled. That's because it is always to one party's advantage to cancel rather than carry on. The exception is that the contract ...
- 17.5k
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 -...
- 17.5k
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 ...
- 11.2k
5
votes
A question about dates generation
This is really just to elaborate on other contributor's answers:
Generating the cash flow schedule is surprisingly complicated. As a general rule of thumb, the following dates are involved for a swap ...
- 11.8k
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 ...
- 173
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 ...
- 86
5
votes
Commodity Asian Swaps
In an Asian-style swap, instead of using the last price quote of the underlying (such as commodity price), they take an average, such as the average closing price over the last month. This is fairly ...
- 12.7k
5
votes
Why does the ultra long-end of a yield curve invert?
I would not say that this is universally acknowledged but here is my view:
Instead of considering par rates, i.e. 10Y and 20Y, consider forward rates, such as 10y and 10y10y. The useful difference ...
- 11.2k
5
votes
Why does the ultra long-end of a yield curve invert?
Suppose 40yr bond and 30yr bond have the same yield. It is a mathematical fact as @attack68 has pointed out, that the convexity of the 40yr is greater than the convexity of the 30yr bond. So ...
- 17.5k
5
votes
Accepted
What does 5 year OIS actually mean?
When people say OIS swap they mean an exchange of some sort of fixed cash flow and in return the receipt of daily OIS based on the "Fed Effective Rate" (FEDL01 Index on Bloomberg).
The floating ...
- 2,653
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 ...
- 5,931
5
votes
Can you calculate modified duration for swaps?
If you know how to calculate them for bonds, you know how to calculate them for swaps.
Assuming you refer to fixed-income swaps where a party receives a fixed rate and pays a floating rate or vice ...
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