QuoteOriginally posted by: TinManWhy if you have a swap that pays in dollars is a dollar curve used, but if a swap pays in sterling a gbp curve is used?It's the same question with the same answer.I see what you mean, I am looking for an answer that is too basic.but here is how I would answer the usd/sterling curve question to someone who knows nothing:"the USD curve is used for a USD paying swap, because it's yield is in the same currency as the payments of the swap. Since I need a projection/discount curve to project rates and discount cashflows it makes sense to have a curve in the same currency"If you really don't answer my question because it's too basic of a thing to ask. Can you at least point to where I can read and figure this out on my own?

Are you looking for an answer for yourself or someone else?Did you read what DocToc posted?

QuoteOriginally posted by: TinManAre you looking for an answer for yourself or someone else?Did you read what DocToc posted?for myself. I also read DocToc's post, but that's almost too much detail.Maybe this way: what's the major difference in building a 6m curve versus a 3m curve?

ok, I use a zero coupon yield curve to discount the cashflows of the swap.But to get the cashflows I need the forward yield curve.so if my swap pays every 3 months I need to know what's the yield for a 3m investment at times x in the future.if my swap pays every 6 months I will need to know what's the yield for a 6m investment at times x in the future.I get that. So if it makes sense that the projection curve for a 3s swap is 3mLibor and 6mLibor for a 6s swap.But what about when I want a 12s swap? why do I still see the same curve I saw for 6s ?If what I wrote above is correct, then it shouldn't be the same curve for 12s.Please tell me if I am wrong.

A 12M indexed swap should be priced of a 12M fwd curve. If you use 6m fwd you'll definitely get it wrong. 6Mv12M basis is currently 13bp in EUR (5Y).

The essence of discounting is the PV calculation which is in many cases can be used to present the price. In exact formulas we use the bond value to discount future cash flow. The implementation of the formulas should use the method that present minimum of the price. Assume that we have to pay $c in 6m and 12m regardless either it a FX swap or something else. If In order to present PV of this cash flow we write the formula c B ( 0 , 6 ) c + B ( 0 , 12 ) c . If one insisted to use 6m curve he should be sure that B ( 0 , 6 ) B ( 6 , 12 ) < B ( 0 , 12 ) if this is not true the use of 6m curve does not make sense.