QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: daveangelQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: daveangelQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: daveangelQuoteOriginally posted by: CuchulainnOh yes, electronic banking EU-wide (or you still use cheques??)but that is all driven by VISA and bank networks. nothing to do with EU.Well, I don't agree 100%.VISA does not do inter-bank transfers. I never got the impression they were too worried about the bilateral 'provision' on my transactions..So, no.And the EU is ? I don't understand the point. There will be bank networks post-BREXIT (if it happens).The point is AFAIR is EU law reduced transaction costs .. at least that what I saw/see as bank customer. That's my point, among others.So 1. Exchange risk2. Interest rate risk3. Transaction costs.Example: monthly transfer from land A to land B (each with own currency, interest rate and degree of regulation). Like a risky bond.yes?what about the cost of insuring and bailing out other countries that do not adhere to the rules ? and the resulting anomalies that result from this ? For example, if Germany still had the DM, it would be far stronger than the Euro and would lead to a faster rebalancing. Similarly if Greece had the Drachma, it would also rebalance much more quickly. On interest rates, the market has certainly figured out how to price the credit risk for different soveriegns. so by no means uniform which is good.You are now shifting the goalposts. I was on a train of thought as a punter and now I have to switch gears and deliberate on macro-economics :DBut a punter would have to deliberate macro-economics in this case. The question is what are the long-term macro effects of BREXIT and what are the short-term discounted values of those effects then then determine the short-term prices of various UK & EU instruments.But that would be another discussion, which is outside the scope of the current one.So what is the scope:A punter betting on BREXIT effects in the financial markets?A international software consulting superstar doing business around the world?this, bespokeQuoteThe point is AFAIR is EU law reduced transaction costs .. at least that what I saw/see as bank customer. That's my point, among others.So 1. Exchange risk2. Interest rate risk3. Transaction costs.Example: monthly transfer from land A to land B (each with own currency, interest rate and degree of regulation). Like a risky bond.Makes sense. I'm not sure how there's an interest rate risk that is not encompassed by the exchange rate risk or that the risks are true costs -- sometimes one gets a bonus, sometimes one loses a bit. EU-UK commerce still has the GBP-EUR exchange rate issue so BREXIT won't affect that. The transaction costs may be slightly higher but I would assume that integration between British and Continental banks is so entrenched, that EU-UK transactions won't need to cost more than UK-UK or EU-EU ones. Plus, there's always PayPal.Other exits from the EU might have bigger consequences.

Now the BREXIT is voted and we saw the swap curve flatten out and the 2y swap rate is consistently higher than 1m to 18m Libor 6m FRA rate. What's the story behind? Am I safe to make money by entering into FRA and a 2y receiver swap (receive swap rate)?

Now the BREXIT is voted and we saw the swap curve flatten out and the 2y swap rate is consistently higher than 1m to 18m Libor 6m FRA rate. What's the story behind? Am I safe to make money by entering into FRA and a 2y receiver swap (receive swap rate)?

I am not sure exactly what you're saying.  Why would you expect the curve to behave differently?  What is a "1m to 18m Libor 6m FRA rate"?    Also, what exactly is the position that you want to get into?

Now the BREXIT is voted and we saw the swap curve flatten out and the 2y swap rate is consistently higher than 1m to 18m Libor 6m FRA rate. What's the story behind? Am I safe to make money by entering into FRA and a 2y receiver swap (receive swap rate)?

I am not sure exactly what you're saying.  Why would you expect the curve to behave differently?  What is a "1m to 18m Libor 6m FRA rate"?    Also, what exactly is the position that you want to get into?

Thanks Martinghoul. Basically, what I have observed is the quotes on 7/6, for example, 
FRA-Libor6m 01M 0.00489
FRA-Libor6m 02M 0.00476
FRA-Libor6m 03M 0.00466
FRA-Libor6m 04M 0.00456
FRA-Libor6m 05M 0.00447
FRA-Libor6m 06M 0.00446
FRA-Libor6m 09M 0.00446
FRA-Libor6m 12M 0.00452
FRA-Libor6m 15M 0.0046
FRA-Libor6m 18M 0.00466
SWAP 02Y 0.004958
Normally, the 2y swap rate would be around average of the FRA rate. But here is not the case. It is higher than all other FRA quotes. If I ever want to use these contracts to build by swap curve, there will be a large upward spike. 
I am trying to understand what forces this happen after BREXIT.

So, to be sure, the rates you're showing above are par rates for 6m FRAs, starting in 1m, 2m,..,18m?  In other words, does 1m, 2m..., 18m denote the term of the FRA or the fwd start?

So, to be sure, the rates you're showing above are par rates for 6m FRAs, starting in 1m, 2m,..,18m?  In other words, does 1m, 2m..., 18m denote the term of the FRA or the fwd start?

Yeah. they are basically representing 1*7, 2*8, 3*9, etc. 

So, to be sure, the rates you're showing above are par rates for 6m FRAs, starting in 1m, 2m,..,18m?  In other words, does 1m, 2m..., 18m denote the term of the FRA or the fwd start?

Yeah. they are basically representing 1*7, 2*8, 3*9, etc. 

Ah, in which case, aren't you forgetting smth?  Remember 1/4 of the 2y swap is the 6M fixing which occurs T+0.  6M LIBOR fixing is arnd 61.5bps, if I am not mistaken.  This would probably explain the difference.

So, to be sure, the rates you're showing above are par rates for 6m FRAs, starting in 1m, 2m,..,18m?  In other words, does 1m, 2m..., 18m denote the term of the FRA or the fwd start?

Yeah. they are basically representing 1*7, 2*8, 3*9, etc. 

Ah, in which case, aren't you forgetting smth?  Remember 1/4 of the 2y swap is the 6M fixing which occurs T+0.  6M LIBOR fixing is arnd 61.5bps, if I am not mistaken.  This would probably explain the difference.

Thanks for the answer. That makes sense.
But the huge jump from Libor fixing to the FRA 1*7 needs explain. Maybe just market expectation, then. 
However, to build the curve, you have no idea what the fixing would be before it gets published. Maybe here something like synthetic depo and FRA starting tomorrow would be needed. 

Many things you could do to "guess" the fixing...  Simplest would be to just keep using the number from the day before.  You could also interpolate, use some sort of a reconstructed depo, etc etc etc.

The "huge jump" is, indeed, expectations, both for rate cuts and for some sort of credit measures which would compress LIBOR/SONIA.

Many thanks Martinghoul. I am trying to avoid using fixing to build my curve since it may bring in volatility of my real time curve. a.k.a before and after fixing was published.
It makes perfect sense of having this rate cut expectation under FRA quotes.