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smacc
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Joined: January 31st, 2014, 3:44 pm

Swap Fixing or Reset Risk

July 2nd, 2014, 1:43 pm

Hi,Can someone explain what fixing or reset risk is when referring to a vanilla fixed-float IR Swap (Fixed v LIB3M for example). How do I calculate fixing/reset risk for a swap?Thanks.
 
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pcaspers
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Joined: June 6th, 2005, 9:49 am

Swap Fixing or Reset Risk

July 2nd, 2014, 5:42 pm

as I know it, it is the change of NPV of the swap when shifting an estimated future fixing by 1 basis point
 
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smacc
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Joined: January 31st, 2014, 3:44 pm

Swap Fixing or Reset Risk

July 3rd, 2014, 10:48 am

So in the case of a Fixed v LIB3M Swap which refixes every quarter; if my next fixing date is in 2 months do I shift all of the future fixings out to maturity (which have been found in the usual way by calculating forward rates) but keep the current period's rate fixed (as it was fixed 1 month ago)? i.e.BASE| <- Fixed -> | <------ Float-------> | <------ Float------> | <------ Float------> | <------ Float ------> |SHOCKED| <- Fixed -> | <- Float + 1bps -> | <- Float + 1bps -> | <- Float + 1bps -> | <- Float + 1bps -> |__ Val <--> Fix <-----------------> Fix <-----------------> Fix <-----------------> Fix <-----------------> MatJust to be certain, do I shock the discount rates on the floating leg of the swap at the same time or just the floating rates in isolation?Can anyone offer an explanation as to why I should care about fixing risk? Maybe then the way to calculate it will become clearer to me.Thanks.
Last edited by smacc on July 2nd, 2014, 10:00 pm, edited 1 time in total.
 
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pcaspers
Posts: 700
Joined: June 6th, 2005, 9:49 am

Swap Fixing or Reset Risk

July 3rd, 2014, 1:02 pm

The already fixed period is not at risk, so should not be shifted. The other periods can also be shifted one by one to get bucketed fixing risk. The discount curve is not touched.Fixing risk reflects the risk of movements in the forward curve used to project the fixings.
 
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Samsaveel
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Joined: April 20th, 2008, 5:47 am

Swap Fixing or Reset Risk

July 7th, 2014, 3:51 am

isn't reset risk also the distance between the Actual Market 3mL fixing ,and the 3m L estimated by Curve Model ?
 
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pcaspers
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Joined: June 6th, 2005, 9:49 am

Swap Fixing or Reset Risk

July 7th, 2014, 9:51 am

QuoteOriginally posted by: Samsaveelisn't reset risk also the distance between the Actual Market 3mL fixing ,and the 3m L estimated by Curve Model ?this might well be another definition. Do you use this notion in practice ?
 
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Samsaveel
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Joined: April 20th, 2008, 5:47 am

Swap Fixing or Reset Risk

July 10th, 2014, 2:44 am

yep ,it came across few times in the past,it's some form of sanity check on the underlying YC Model.
 
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smacc
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Joined: January 31st, 2014, 3:44 pm

Swap Fixing or Reset Risk

July 10th, 2014, 12:11 pm

Can you give a bit more detail about what you mean by 'distance' Samsaveel?
 
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Samsaveel
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Joined: April 20th, 2008, 5:47 am

Swap Fixing or Reset Risk

July 12th, 2014, 2:04 am

the distance is the delta between estimated 3 ML and Actual 3m L fixing .
 
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smacc
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Joined: January 31st, 2014, 3:44 pm

Swap Fixing or Reset Risk

July 14th, 2014, 8:18 am

So the delta of the next estimated fixing (a floating rate) - the delta of the current fixing (a fixed rate)? How are you bumping the current fixing when it is a fixed rate?
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