Basic question regarding evaluation of money market operations

unquantifiable · September 23rd, 2004, 6:47 am

hi...seem to be stuck on something utterly basic...say, i have some money market borrowing (and lending) trades for various tenors ranging from o/n to 6 months.if i were to compute some sort of a representative average rate for the cost of borrowing across these, how would i go abt doing it..?also what is the fallacy in the following calculation ?For the trades1) Multiply the amount with the tenor / day count basis and Total 2) Calculate the interest amount and Total Divide the total in 2 by the total in 1...appreciate help....cheers

Aaron · September 24th, 2004, 12:01 am

There's no good way to summarize the term structure of interest rates with a single number.Taking a weighted average yield of a portfolio is meaningful, but it's easy to misinterpret the number. Having all of your portfolio earning 2% with 3 month maturity is not the same as having half of it in overnight funds at 1.75% and the other half in 6 month funds at 2.25%.

Icecloud · September 24th, 2004, 8:43 am

Yup agree with Aaron. What I normally do is just separate them into buckets (1w, 1s, 2s... 1y) and see my PVo1 possy for each tenor bucket... if you want a weighted average then prob the PVo1 of your portfolio is a good basis.