Skip to main content
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 ...
Raskolnikov's user avatar
  • 1,527
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 ...
Alex C's user avatar
  • 9,372
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"...
Jan Stuller's user avatar
  • 6,098
11 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 ...
Quantuple's user avatar
  • 14.6k
10 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 ...
will's user avatar
  • 2,571
10 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 ...
AKdemy's user avatar
  • 8,739
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 ...
Alex C's user avatar
  • 9,372
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 ...
AKdemy's user avatar
  • 8,739
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 ...
compilation-error's user avatar
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’...
Magic is in the chain's user avatar
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 ...
Marcino's user avatar
  • 507
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 ...
Alex C's user avatar
  • 9,372
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 ...
math's user avatar
  • 1,718
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 ...
quant360's user avatar
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) ...
dm63's user avatar
  • 17.1k
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 ...
Adam N.'s user avatar
  • 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 (...
Attack68's user avatar
  • 10.3k
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)...
Dimitri Vulis's user avatar
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 ...
Attack68's user avatar
  • 10.3k
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/...
Jan Stuller's user avatar
  • 6,098
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 ...
Dimitri Vulis's user avatar
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 ...
dm63's user avatar
  • 17.1k
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 ...
Bozothegrey's user avatar
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.
Mark Joshi's user avatar
  • 6,923
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 ...
Mats Lind's user avatar
  • 1,402
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 ...
dm63's user avatar
  • 17.1k
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 -...
dm63's user avatar
  • 17.1k
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 ...
Attack68's user avatar
  • 10.3k
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 ...
MH.Q's user avatar
  • 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 ...
Fred's user avatar
  • 86

Only top scored, non community-wiki answers of a minimum length are eligible