Does it make sense to think about IRS returns?

miscelania · May 25th, 2012, 7:19 am

Hello,I wanna ask you if it does make sense to speak about the returns from an IRS.I wonder if people invest in IRS to make returns or if they just invest in IRS for heding purposes (other purposes?).I am also thinking about CMS products that relate to investment in IRS rates, and I am confused about whether it make sense to think aboutIRS returns.I wonder if anybody has an idea about the issue.Thank you,

list · May 25th, 2012, 2:45 pm

if one thinks that swap rate should be different than market value one can take a position expecting higher profit than counterparty. But it might make sense other investment with similar risk but with higher return. But always better to be specific.

miscelania · May 28th, 2012, 2:04 pm

QuoteOriginally posted by: listif one thinks that swap rate should be different than market value one can take a position expecting higher profit than counterparty. But it might make sense other investment with similar risk but with higher return. But always better to be specific.Ok. Thanks.Do you mean that, if one uses IRS for speculative purposes, then it does make sense to speak about IRS returns?

rmax · May 28th, 2012, 3:27 pm

My 2 New Greek DrachmaPeople will speculate and/or hedge using IRS.When you say return what do you mean by this? Normally I would say return on capital employed; or in a derivatives case the return on the Balance Sheet utilised. That is normally measured as P&L of Swap versus the "funding rate" which takes into account a whole load of things in addition to pure funding.

bojan · May 28th, 2012, 3:28 pm

If you buy a naked fixed-for-floating swap you are essentially running a synthetic bank, lending at the long term rate and borrowing at short term rates. Does it make sense to talk about return for a bank? How do you account for costs of maintaining a high credit rating and providing suitable collateral? What happens when there is a crunch? (Hint: ask bank equity holders!)

miscelania · May 28th, 2012, 3:45 pm

QuoteOriginally posted by: rmaxWhen you say return what do you mean by this? Normally I would say return on capital employed; or in a derivatives case the return on the Balance Sheet utilised. That is normally measured as P&L of Swap versus the "funding rate" which takes into account a whole load of things in addition to pure funding.By "return" I mean the same idea as when you consider, for instance, stock holding returnsThank you.