In 1m vs. 3m libor swaps the spread is on the 1m leg. Let's assume I am paying the 1m + spread and recv 3m libor.in term so being long or short the market - how does one figure this out. any explanation on how to think about it greatly appreciated.thanks

Hi Drona,Here you have to clarify which "market" you are referring to. In the rates world, 'long' and 'short' are not as simple as in equities - with a 1m vs. 3m libor basis swap, your duration, i.e. underlying rate exposure is very small since both rates are floating. If payment is made every 3m, your duration is three months. So there is negligible underlying rate risk, but you are exposure to the short term rate term structure. That is, the bulk of your risk is to changes in the spread added to 1m libor. if you are paying 1m libor + spread, your position benefits if that spread increases...

Hi,Thank you very much. really appreciate this.

I always think of it as follows:let f and g be some functions of the LIBORs.basis spread = f(3m LIBOR) - g(1m LIBOR)...saying you are paying basis so you are paying the 1m LIBOR + spread leg and receiving 3m LIBOR. Therefore, if you're paying this leg you want 1m LIBOR to fall therefore the basis spread to increase.

Your position is likely to behave like it's long the mkt (with the usual caveats).

Thanks.I am trying to understand how the 3m 1m spread is used in practice to pricing of the basis swap. I do not have much experience in this area - any pointers appreciated.qn 1: what is the usual tenor of these basis swaps ?qn 2: spread adjusted curve construction:step1 We have a swap curve. step 2 Is the 3s1s spread applied to the swap curve and now we have a 1m libor curve i.e. we can now compute 1m forward libor rates. Is this the idea ?step 3: we also need to compute 3m forward libor rates - is the swap curve a valid curve to compute this - if so why ?I understand ED's are used to compute the swap curve upto a certain tenor.thanks for any inputs. I am looking at other posts to understand this too.

1) There's no usual tenor... You can trade pretty much whatever tenor/fwd combination you like.2) In USD you have a mkt for both 3m and 1m swaps (and FRAs). Thus you can build two curves independently. That means that, really, you could trade the basis as two vanilla swaps, if you so desired.