SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
Leo77
Topic Author
Posts: 5
Joined: February 1st, 2012, 1:39 am

Basis Trades

April 21st, 2014, 12:00 pm

If you have a basis swap, ie 1m libor floating rate, or 1m cap/floor trade, and assuming non colleteraized, so we must use libor discounting, would you use 3m libor curve or basis(1m libor basis) as the discount curve to get present value of cash flows? Any available articles on web? thanks!
Last edited by Leo77 on April 20th, 2014, 10:00 pm, edited 1 time in total.
 
User avatar
Samsaveel
Posts: 436
Joined: April 20th, 2008, 5:47 am

Basis Trades

April 21st, 2014, 12:49 pm

perform a PL impact analysis value the swap off the standard 3m-Libor curve,and then build your 1m libor curve off of your 3 mL - (1m vs 3m) basis swap spreads.and see what you get
 
User avatar
Leo77
Topic Author
Posts: 5
Joined: February 1st, 2012, 1:39 am

Basis Trades

April 21st, 2014, 5:54 pm

I get that the forwards should be built with 1m curve, but should the discounting be also done with the same curve? I don't get how doing pnl analysis helps answer this? thanks
 
User avatar
Leo77
Topic Author
Posts: 5
Joined: February 1st, 2012, 1:39 am

Basis Trades

April 21st, 2014, 5:54 pm

I get that the forwards should be built with 1m curve, but should the discounting be also done with the same curve? I don't get how doing pnl analysis helps answer this? thanks
 
User avatar
Samsaveel
Posts: 436
Joined: April 20th, 2008, 5:47 am

Basis Trades

April 22nd, 2014, 1:37 am

uncollateralized ,use same curve for forward rate projection and discounting> consistency.< I don't get how doing pnl analysis helps answer this> well if you value the swap on the basis curve ,you will have a smoothed PL ,because you are capturing the basis in the marketvs . valuation under the one curve methodology using standard 3 month libor curve.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On