It is not you. I don't understand it either.

There are models that price instruments called Inverse Interest Only Strips (IIO). The IIOs have an effective cap. A BGS is equivalent to an IIO without any cap. For example,an IIO might have a coupon of that is MAX(0,2.5%-LIBOR) -- hence an cap of 2.50%. The BGS has no cap.

<t>Use Euro$ futures for the the first three years (with convexity correction) and the bonds + swap spreads for the rest of the curve. If you don't have access to real-time market data, the FRED H15 database has both Treasury rates and swap rates. Not ideal levels, but more than adequate to get star...

<t>I would say that the main difference is credit risk. Exchange traded options are centrally cleared so the parties are indifferent to both the number of parties and the names of the parties. I can sell $100MM in options on a exchange to 25 different counterparties and it is still one transaction. ...

<t>Portfolio DV01 is not really meaningful if you have positions all over the curve (sort of like taking the average depth of a swimming pool). Positions at the opposite end of the curve (e. .g, short 2 years, long 10 year) exacerbates the situation.A parallel shift (say up 50 basis points) along th...

<t>1) Yes, PV is the 'mark to market' of the book (the present value of future cash flows)2) The year to date (or month to date) P&L would inlcude the net cash during that time interval -- but it has no impact on the fair value of the book3) If you want to compute the total P&L on a trade (o...

If you have stuff like libor-in-arrears, changes in volatility would affect p&l.IIRC, we used to compute theta by assuming that today's zero curve was the same as the next day's zero curve and then revalued all the trades. This had the effect of moving all cash flows one day closer.

<t>Cash is not included in PV. ValueToday = PVToday + NetCashTodaySo the PV of your book will have a 'sawtooth' appearance over time -- PV rises until the cash payment date and then dropsGainLossToday = (PVToday - PVYesterday) + NetCashTodayPreviously paid cash (along with closed out futures positio...

Yes, on callable deal, the notional plus accrued interest (if any) is exchanged on the delivery date.

If the portfolio is in the red, I assume that the portfolio is net 'pay fixed'. The risk would be falling interest rates.

Yes, that is the way I believe it is done.

<t>QuoteOriginally posted by: Samsaveelreallyold: if you have a portfolio of vanilla swaps ,pay fixed for each swap >4.5% and receive 3 month libor.:what is the daily PL beahviour under current market conditions?That would depend on the maturity of the swap. Sorry if I am being obtuse, I'm just not ...

QuoteOriginally posted by: Samsaveelthanks guy's.reallyOld :why it will have an impact more on Fwd starting swaps. ?A fwd starting swap could have its start date on a jagged 'down' point and have its maturity date on a jagged 'up' point.

<t>Not sure that I fully understand your question but here goes:1) You need to consider the Treasury/LIBOR spread in your risk 2) We used (this is going back nearly 15 years) also looked at the sensitivity to changes in three-month forward rates. We essentially created a curve that consisted entirel...

<t>It will affect the pricing of vanilla swaps (especially forward starting). You should use some kind of spline routine to smooth out the forward rates. The trick is to smooth the forward rates and still be internally consistent. For example, if you include a seven-year swap in your inputs, the cur...