Swap Mid rates to high

CPTNEMO · April 23rd, 2004, 12:03 am

OK so I have modeled my swap curve and adjusted for convexity but my midrates are higher than current market rates. Any ideas to what the problem is? I would appreciate any input. I will post model if necessary.Thanks

jimmy · April 23rd, 2004, 8:09 am

few questions:- which swap matu are you looking at?- too high by how many basis-points?- which convexity formula do you use?- where are you getting the vols for the adjustment computation?

CPTNEMO · April 23rd, 2004, 11:45 am

I am looking at 2yr, 3yr, 4yr, 5yr, 6yr, and 7yr swap rates which are all too high by 20-40bp. For convexity I am using the formula 1/2*sigma^2*t1*t2. Please help!

jimmy · April 23rd, 2004, 12:10 pm

- 20-40bps is too much, a convexity adjustment will not make up for it (post your spreadsheet, if you've done one, I'll have a look at it).- euro-futures are not liquid enough to compute swap rate with a maturity greater than 3 years (look at the bid/offer, size of those contracts!...).- the convexity adjustment is: fwd rate = fut rate - 0.25* fut rate^2 *vol^2 * t.JM

CPTNEMO · April 23rd, 2004, 3:42 pm

Well, I made some adjustments and I think I actually came up with the correct answer. My swap rates now match up with the current market swap rates. I then can take these rates and subtract my mid rates and come up with my spread. Is this the correct way of approaching it? Attached is my model for critiquing. I really appreciate your help and input. Thanks!

slevin · April 23rd, 2004, 4:29 pm

QuoteOriginally posted by: CPTNEMOI am looking at 2yr, 3yr, 4yr, 5yr, 6yr, and 7yr swap rates which are all too high by 20-40bp. For convexity I am using the formula 1/2*sigma^2*t1*t2. Please help!You are using swaps - neither are sensetive to vol. Enlighten me, why do you need convexity adjustment? Oh, got it - you are trying to price swaps. Looking at your spread sheet, I would say that you might as well write a yield curve stripper instead and get your swap rates fromt the curve