Sorry guys, I think im not beeing clear.Say there is an IRS with the specifications:Notional: Principal: 1,000,000$Fixed Rate: 5.75% ACTUAL_360Floating index: 6M Libor ACTUAL_360Original Term: 3YRemaining Term: 2YMy first question would be: "How would this IRS usually be quoted when traded on the market?" Would it be quoted as the "net present value" (Present value of floating - Present value of fixed in dollars). Or would it be quoted as a interest rate? or as an All In Cost (spred from US treasery in points) or something else?? What is most common in the IRS markets?My second question would be: "Based on the answer to Q1, how can I take this quote and calculate the "implied" zero cupon interest rate for Maturity 2Y";

though it is not related to this discussion it might be interesting problem to derive bond implied rate ( or implied yield curve ) from IRSs or from currency swaps.

QuoteOriginally posted by: listthough it is not related to this discussion it might be interesting problem to derive bond implied rate ( or implied yield curve ) from IRSs or from currency swaps.You can't do this, without making all sorts of arbitrary assumptions...peligroso, swaps in the mkt will be quoted as par rates, usually. In the US, sometimes they're quoted as a rate spread to USTs. Of course, if you're looking to unwind an existing position, you may wish to see a PV quote, rather than a rate.

without assumption we have only existing historical data or measurements. Any fact derived based on an assumption. Classical pricing in particular stems from the equality of PVs assumption.

There are all sorts of assumptions out there. Pls note that I said, precisely, that the assumptions you'd need to make would have to be "arbitrary". That's hardly a good way to do things.

QuoteOriginally posted by: MartinghoulThere are all sorts of assumptions out there. Pls note that I said, precisely, that the assumptions you'd need to make would have to be "arbitrary". That's hardly a good way to do things.What sort are the assumption : log normal stock and Poison distributed defaults?

ok, par rates and sometimes spreads. excellent!Now correct me if im wrong, but if i make out the zero cupon rate or ( "discount-factor" if you will ) for this IRS, Is that not just the same as to make out the zero cupon discount factor of the floating index to the maturity.In the example below, If calculate present value for "Libor 6M Libor ACTUAL_360" and extrapolate that into the maturity 2Y, why would I need to use the IRS quote at all?the reason Im asking is that Im a software engineer and Im creating software for yieldcurve construction. One of our MM traders say its importent that we may use IRS quotes to make out the zero cupon rate fot certain maturities..

QuoteOriginally posted by: peligrosook, par rates and sometimes spreads. excellent!Now correct me if im wrong, but if i make out the zero cupon rate or ( "discount-factor" if you will ) for this IRS, Is that not just the same as to make out the zero cupon discount factor of the floating index to the maturity.In the example below, If calculate present value for "Libor 6M Libor ACTUAL_360" and extrapolate that into the maturity 2Y, why would I need to use the IRS quote at all?the reason Im asking is that Im a software engineer and Im creating software for yieldcurve construction. One of our MM traders say its importent that we may use IRS quotes to make out the zero cupon rate fot certain maturities..you really ought to look at the Uri Ron paper from Bank of Canada. it will explain a lot of this. You are bootstrapping the zero curve from market instruments.

"calculate present value for "Libor 6M Libor ACTUAL_360" and extrapolate that into the maturity 2Y" // it depends how you are going extrapolate. Are you going to assume that Libor forward rates 6-12, 12-18, 18-24 Libor are all equal to Libor 6M Libor ACTUAL_360. In this case you indeed do not need irs quotes. Otherwise quotes can be occurred helpful for your construction.

QuoteOriginally posted by: listQuoteOriginally posted by: MartinghoulThere are all sorts of assumptions out there. Pls note that I said, precisely, that the assumptions you'd need to make would have to be "arbitrary". That's hardly a good way to do things.What sort are the assumption : log normal stock and Poison distributed defaults?That won't get you very far... Assumptions I was referring to had to do with balance sheet scarcity and cost.

QuoteOriginally posted by: list"calculate present value for "Libor 6M Libor ACTUAL_360" and extrapolate that into the maturity 2Y" // it depends how you are going extrapolate. Are you going to assume that Libor forward rates 6-12, 12-18, 18-24 Libor are all equal to Libor 6M Libor ACTUAL_360. In this case you indeed do not need irs quotes. Otherwise quotes can be occurred helpful for your construction.How?

peligroso, as daveA suggests, you need to look at Uri Ron's paper, as it should give you a measure of basic understanding of how curve construction is done. As is, you're doing all sorts of things in a conceptually incorrect fashion.

it is always the best to start with how others solve similar problem. It will be helpful to make next adjustments or to develop yours approach. Without reading it might make sense to use historical ratio for forward LIBOR rates which you need to apply for calculation. You also can use historical data for estimate forward T-US / LIBOR as far as LIBOR is tied to $$ rate in pound environment. It is also more complex linear models which will be used forward /$$/pound rate.

QuoteOriginally posted by: listit is always the best to start with how others solve similar problem. It will be helpful to make next adjustments or to develop yours approach. Without reading it might make sense to use historical ratio for forward LIBOR rates which you need to apply for calculation. You also can use historical data for estimate forward T-US / LIBOR as far as LIBOR is tied to $$ rate in pound environment. It is also more complex linear models which will be used forward /$$/pound rate.Huh?

QuoteOriginally posted by: MartinghoulQuoteOriginally posted by: listit is always the best to start with how others solve similar problem. It will be helpful to make next adjustments or to develop yours approach. Without reading it might make sense to use historical ratio for forward LIBOR rates which you need to apply for calculation. You also can use historical data for estimate forward T-US / LIBOR as far as LIBOR is tied to $$ rate in pound environment. It is also more complex linear models which will be used forward /$$/pound rate.Huh?you have just been "listed"