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Adoniz
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Swap..Euribor hedge

September 13th, 2010, 7:52 am

I have 2 questions I was thinking about......1)If you have a position in ex. 2Y swap (rec) and hedge with a government instrument (short DV01 equivalent shatz future) then you have a swap spread position. But if you hedge with a strip of Euribor futures (out to 2 years).....what kind of position is this...2)If you have a position in ex. 10Y swap (rec) and wants to hedge with euribors, I would assume that you would hefge up unto the most liquid euribor future and then hedge the rest with a forward starting swap?
 
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daveangel
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Swap..Euribor hedge

September 13th, 2010, 8:03 am

Quote 1)If you have a position in ex. 2Y swap (rec) and hedge with a government instrument (short DV01 equivalent shatz future) then you have a swap spread position. But if you hedge with a strip of Euribor futures (out to 2 years).....what kind of position is this... I dont know if it has a formal name but in this trade you are trading the convexity adjustment ... Quote 2)If you have a position in ex. 10Y swap (rec) and wants to hedge with euribors, I would assume that you would hefge up unto the most liquid euribor future and then hedge the rest with a forward starting swap? or you could just reverse the position with another customer
knowledge comes, wisdom lingers
 
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Adoniz
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Swap..Euribor hedge

September 13th, 2010, 8:11 am

@ dave......do you mean if I hedge the swap using euribor futures I am trading the convexity adjustment?
 
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daveangel
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Swap..Euribor hedge

September 13th, 2010, 8:33 am

classic trade - people made fortunes out of them before they knew what convexity adjustment was ..but for 2 year trades the CA is not going to be huge
knowledge comes, wisdom lingers
 
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dvl84
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Swap..Euribor hedge

October 20th, 2010, 3:15 pm

As far as I know most swaps are hedged with euribors, for longer dated swaps market makers will also buy/sell some bunds. After that many people will try to do a curve trade 10/30s or so - to end up with a euribors vs swap position.
 
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Martinghoul
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Swap..Euribor hedge

October 20th, 2010, 6:50 pm

I might add that, if you have hedged your 2y and longer EUR swap with Euribor contracts, you're also running a 3s6s basis position.
 
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dvl84
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Swap..Euribor hedge

October 21st, 2010, 8:48 am

Is there someone who got a good suggestion what to read for convexity/financing bias correction in euribor contracts?
 
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Martinghoul
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Swap..Euribor hedge

October 21st, 2010, 9:16 am

Euribors are not much different to Eurodollars in that respect. Therefore, Burghardt's "Eurodollar Futures and Options Handbook" is the seminal source.
 
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bonosmate
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Swap..Euribor hedge

October 21st, 2010, 9:32 am

how about the euribor and forward swap hedge? hedging a 10y position with this approach has to be less accurate than other approaches!!
 
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Martinghoul
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Swap..Euribor hedge

October 21st, 2010, 9:47 am

Well, I don't really understand what the goal might be here... The best hedge for a 10y swap position is an unwind or, equivalently, a new offsetting 10y swap. Why exactly the need to hedge it with Euribors and fwd-starting swaps?
 
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bonosmate
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Swap..Euribor hedge

October 21st, 2010, 9:59 am

perhaps there may be some advantage in foward basis? not sure. I agree...it makes perfect sense to just offset the position!!
 
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bonosmate
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Swap..Euribor hedge

October 21st, 2010, 9:59 am

perhaps there may be some advantage in foward basis? not sure. I agree...it makes perfect sense to just offset the position!!
 
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dvl84
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Swap..Euribor hedge

October 22nd, 2010, 7:22 am

QuoteOriginally posted by: MartinghoulWell, I don't really understand what the goal might be here... The best hedge for a 10y swap position is an unwind or, equivalently, a new offsetting 10y swap. Why exactly the need to hedge it with Euribors and fwd-starting swaps?If you are a market maker the entire point is that you take the other side if there is no other side.. in an ideal world you wanna buy on the bid and then sell at the offer... in real life it doesn't work like that too much.Imagine someone gives you 100mm 10yr, you make a new 2way showing a better bid and guess what .. you get given again; you now receive in 10yr 200mm. Appearantly there is a large payer in the market because all the brokers are better payers as well. Now you can do a couple of things - 1) do nothing and pray 2) take a loss and trade with the brokers 3) hedge using some futures such that you are 90% hedged and get out of the rest of your exposure later. Apart from knowing how many futures you'd need to trade you also want a methodology to derive at a theorital price based on instruments other then swaps, because is this way you kinow the price that you can get out if there is no broker market.
 
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Martinghoul
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Swap..Euribor hedge

October 22nd, 2010, 2:22 pm

I realize all this, dvl, thanks... Firstly, I just wanted to understand the context, which may or may not have been the mkt-making environment you refer to. Secondly, my comment was mostly in response to bono's idea of hedging a spot position using fwd swaps. I simply suggested that I don't see how it would be feasible in any setting, including the one you've described.
 
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Adoniz
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Posts: 173
Joined: October 8th, 2008, 2:33 pm

Swap..Euribor hedge

March 23rd, 2011, 9:19 am

QuoteOriginally posted by: dvl84QuoteOriginally posted by: MartinghoulWell, I don't really understand what the goal might be here... The best hedge for a 10y swap position is an unwind or, equivalently, a new offsetting 10y swap. Why exactly the need to hedge it with Euribors and fwd-starting swaps?If you are a market maker the entire point is that you take the other side if there is no other side.. in an ideal world you wanna buy on the bid and then sell at the offer... in real life it doesn't work like that too much.Imagine someone gives you 100mm 10yr, you make a new 2way showing a better bid and guess what .. you get given again; you now receive in 10yr 200mm. Appearantly there is a large payer in the market because all the brokers are better payers as well. Now you can do a couple of things - 1) do nothing and pray 2) take a loss and trade with the brokers 3) hedge using some futures such that you are 90% hedged and get out of the rest of your exposure later. Apart from knowing how many futures you'd need to trade you also want a methodology to derive at a theorital price based on instruments other then swaps, because is this way you kinow the price that you can get out if there is no broker market.Dont understand a terminlogy issue.....if someone gives me 100mm....Am i paying or receiving fix...!!!
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