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saharasjj
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Posts: 15
Joined: July 13th, 2010, 8:59 am

3s versus 6s swap

March 15th, 2011, 2:17 pm

Hi,If I was asked how would I hedge a 3s versus 6s swap - what long and short position would i take - how would i answer this, given that you determine which way rates will move?
 
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DocToc
Posts: 239
Joined: January 20th, 2010, 9:32 am

3s versus 6s swap

March 15th, 2011, 8:29 pm

well if you are recieving 3s and paying 6s wouldn't the best hedge be to pay 3s and recieve 6s i.e. pay in a standard EURO swap (>2Y) so you are recieving 6m EURIBOR and recieve in a swap vs 3s so you are recieving 3's - i think that would be almost perfect apart from minutiae..
 
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saharasjj
Topic Author
Posts: 15
Joined: July 13th, 2010, 8:59 am

3s versus 6s swap

March 16th, 2011, 12:26 pm

thank you SO much I have been searching everywhere to answer this and my answer i thoguht i had was wrong but i wasnt given a reason. thanks for the help
 
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Costeanu
Posts: 189
Joined: December 29th, 2008, 5:33 pm

3s versus 6s swap

March 16th, 2011, 4:17 pm

Saharasjj,Not sure I understand your question correctly, but I think you mean that one party pays 3y CMS rate (plus a spread) and the other pays 6y CMS rate (where CMS = constant maturity swap).If that is the case, you need to look into CMS pricing. It's possible to statically hedge a CMS with swaptions. You can compare this with Libor in arrears, which can be statically hedged with caplets. In the CMS case there is a slight model dependency, but the general idea is the same. As always, the treatment in the book by Andersen and Piterbarg is excellent. Best of luck.
 
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DocToc
Posts: 239
Joined: January 20th, 2010, 9:32 am

3s versus 6s swap

March 17th, 2011, 8:12 pm

haven't heard about 3s vs 6s cms swaps - these aren't really traded :-)I guessed he was referring to basis swaps..
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