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Lawrence3
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Joined: July 11th, 2007, 12:50 am

Question regarding weights in matched maturity asset swap.

July 11th, 2007, 7:46 am

The asset swap being cash bonds vs interest rate swap to matched maturity.I understand that something about the DV01 keeps the amounts from being the same. Is there a proper formula I can use to get the amounts? For example, how do I weigh amounts in a 10 year bond against an Interest Rate Swap of matched maturity?Sorry if Im being obtuse, but this is giving me problems. Thank you very much.
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Question regarding weights in matched maturity asset swap.

July 20th, 2007, 7:26 pm

Unless it's some really obscure point and the dv01 mismatch is tiny, I am pretty sure that in practice it's safe to assume you have to match dv01s on the swap and the bond... Depending on what type of asset swap you actually trade, the exact dynamics of your dv01 mismatch and its implications can vary. For examples, yield/yield asset swap, the simplest, is duration neutral, but not convexity-neutral and not curve-neutral. Par/par asset swap would, by definition, be not duration-neutral. I think the cleanest type of asset swap in terms of residual risks is a Z-spread one.Anyways, I can help if you need more info...
 
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Lawrence3
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Joined: July 11th, 2007, 12:50 am

Question regarding weights in matched maturity asset swap.

July 26th, 2007, 3:28 am

QuoteOriginally posted by: dkorsunskyUnless it's some really obscure point and the dv01 mismatch is tiny, I am pretty sure that in practice it's safe to assume you have to match dv01s on the swap and the bond... Depending on what type of asset swap you actually trade, the exact dynamics of your dv01 mismatch and its implications can vary. For examples, yield/yield asset swap, the simplest, is duration neutral, but not convexity-neutral and not curve-neutral. Par/par asset swap would, by definition, be not duration-neutral. I think the cleanest type of asset swap in terms of residual risks is a Z-spread one.Anyways, I can help if you need more info...I am asking about yield/yield.I thought convexity and curve issues are pretty much priced into the asset swap, and shouldnt have any bearing on the weightings. Am I wrong about this? I am seeing trades where there are matched amounts on matched maturity, and others where there is as much as a 2% size discrepancy on a 10 year trade. This is throwing me for a loop.If I need to account for convexity issues when weighting, what can I do when incorporating this into a spreadsheet? Any help would be appreciated beacuse this really is uncharted territory for me. Much appreciated.
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Question regarding weights in matched maturity asset swap.

July 26th, 2007, 5:07 am

If you want I can send you a paper that may be a good startiing point for you... Cheers.
 
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Lawrence3
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Joined: July 11th, 2007, 12:50 am

Question regarding weights in matched maturity asset swap.

July 27th, 2007, 4:06 am

QuoteOriginally posted by: dkorsunskyIf you want I can send you a paper that may be a good startiing point for you... Cheers.If its not a problem that would be a real life saver. Please send it to my hotmail, beacuse my wife is due with our first and Im not sure when I will be in the office.slawrence3_1976@hotmail.comThank you very much.