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rogered
Topic Author
Posts: 6
Joined: November 17th, 2014, 4:25 pm

### Pricing IRBS using Avg Arithmetic Fed Funds

Sorry this is a repost-don't know how to deleteHi I'm looking to value FED Funds futures vs 3m Libor basis swaps, however I am confused as to how to calculate these using Takada 2011 http://www.researchgate.net/publication ... :Currently, I am valuing the basis swap as [PV(leg 1) - PV(leg 2)] / PV01(leg 1)Where leg 2 is the one you want to apply the spread to (i.e. the FF leg) priced by:The collateralized 3-month forward 'arithmetically averaged' OIS rate is given by equation 42 pg 15 where convexity adjustment is eqs 29 and 30. Is the above correct and what should the convexity adj in eq 42 represent:1) 'The AAON can be reasonably approximated by the RHS of 3? i.e. log(1+d(Ts,Te)Rc(Ts,Te)' 2) or do I find the compounded rate and subtract (d(Ts,Te)Rc(Ts,Te)^2)/2 (eqn4). 3) or 'the other convexity term is dynamic...' implies that an aditional convexity adjustment to 2) is needed which are found in eqs 29 and 30?I'm pretty confused and would appreciate any guidance!
Last edited by rogered on November 22nd, 2014, 11:00 pm, edited 1 time in total.

MaxwellSheffield
Posts: 70
Joined: December 17th, 2013, 11:08 pm

### Pricing IRBS using Avg Arithmetic Fed Funds

you mean Fed fund rates vs 3M Libor Basis swap? If it can help you, the adjustment is negligible.

tglauner
Posts: 16
Joined: December 27th, 2002, 7:44 pm

### Re: Pricing IRBS using Avg Arithmetic Fed Funds

you mean Fed fund rates vs 3M Libor Basis swap? If it can help you, the adjustment is negligible.
Soon we may have long dated 1D SOFR swaps where the cashflow is calculated based on the average rate rather than compounded rate (custom swap to hedge the corresponding loan). For a 30Y Fixed vs SOFR average can you please elaborate the rough size of the convexity adjustment. The paper referenced refers to 3-6 bp for 30 year deal.

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