Hi,I am wondering how dealers put a level on long dated swaps (USD for instance) for which the market isn't as liquid. How would one assess the level of a 50y or 60y swap theoretically and practically. I know there is a market for 30s40s and 30s50s switches (rather illiquid for the latter) and really wonder what the considerations (convexity etc.) and methods are to put a price on it.Naively, having a stochastic model for rates (short or not) calibrated on the liquid part, then diffusing to calculate very long part of the market might be a solution (?) but it is to me rather expensive and thought there might be a trader's quick approximation for this.Thanks for your insights.

Hi,It looks I don't have much success here... No one has a clue? Or is it more a quant question?thanks

There are a couple of techniques, such as looking at the slope of the period gaps before. Most of the time it is really just supply and demand based on exotic options flows (20y20y 10y30y, ect..)

There's a couple of ways to guesstimate, as nike says. They're imprecise, at best.

Empirically, the curve seems to fall slightly at the very far end. For example for USD the 50 year swap rate is about 3bp lower than the 40 year rate. According to Flavell's book, this is likely a convexity effect.

Hi, Thanks. Indeed it is most likely a convexity effect but I was wondering how practically this was implemented and assess on the swap curve. Reading the Salomon Bro. papers I understand the rationale of having probability weighted scenarios hence my question of rate diffusion and so on which seems rather expensive to run.As for the supply demand, yes it does of course drive a lot the levels but someone at some point has to assess where the theoretical levels should be based on hedging strategies especially for very illiquid levels, no?thanks

Can you explain the convexity effect this far out the curve ? Whats the rationale there ?

QuoteOriginally posted by: PadaiuCan you explain the convexity effect this far out the curve ? Whats the rationale there ?Have you read Antti Ilmanen's "Understanding the Yield Curve" papers?