Building a 3M Libor Curve

ANORAK · July 10th, 2008, 8:10 am

Hi all,I am building a 3M curve in EUR by subtracting the 3V6 basis spreads from the regular 6M EURIBOR swap quotes, if I also use 3M futures in my 3M curve build, should I use the futures market quotes as they are, or do they need to be adjusted as well?Also, if building a standard (6M) zero curve using the regular 6M Euribor swap quotes, should you add the 3V6 spread if you want to use the 3M futures in the curve build?Thanks.

Martinghoul · July 10th, 2008, 10:29 am

The futures need a convexity adjustment, which is not directly related to the 3s6s basis.The answer to your other question is yes, as well. I hope you're taking into account the fact that the 3s6s basis itself has a term structure, so, to be precise, you can't just be adding a constant spread to everything.

ANORAK · July 10th, 2008, 11:44 am

Thanks for that, Have a term structure for the spreads so not just using a flat spread.Have a convexity adjustment at the moment as well, but that actually brings up another point, is it okay to apply the convexity adjustment to the future to get a convexity adjusted price for use in a 3M curve, and then apply a 1V3 or 3V6 spread to the convexity adjusted price to get rates for a 1M and 6M curve or does the convexity adjustment need to change depending on the frequency the rate is to be used on? Thanks

Martinghoul · July 10th, 2008, 12:20 pm

The convexity adjustment most probably does need to change, but we're getting into hair-splitting territory now, IMHO. So I don't adjust the convexity adjustment, fwiw, which is not to say that there aren't anal people out there who do the right and proper thing. It really depends on how sensitive your book is. Personally, I have never seen a book where it matters all that much, but that's just my opinion.

ANORAK · July 10th, 2008, 1:11 pm

Thanks for your help.

outcry · July 10th, 2008, 7:26 pm

Hallo,I think I understand the anwer just given - BUT Anorak adds the 3V6 basis to swap rates - where does that leaves his adjustment to the 3M Futures contracts he use for his 6M curve (I'm not thinking about the convexity adjustment but the 3V6 basis) - if he were to price a 3year swap V6 starting in 4 months time - his 3M Futures should be adjusted for this 3V6 (not just his swap rates ) or how is it handled - or do I misunderstand the point here?OC