SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
DocToc
Topic Author
Posts: 239
Joined: January 20th, 2010, 9:32 am

swap carry and roll down once more..

January 22nd, 2011, 4:26 pm

Hi i know this question has been answered before as well.Assuming 10 year swap rate is 3.5% and 9 year swap rate is 3%, is my daily roll down = (10y Swap - 9y Swap)*not*1/360, assuming not = 10m then => daily rolldown pnl = (50bps)*10m*(1/360) = 138 EUR...?So in a 100m EUR 10y swap if I were paying I'd lose a total of 1380EUR a day due to roll down - this seems a bit cheap to me.......Further I have used the 9y swap rather than the 1y forward 9year swap as 1year from now i'd have a 9y swap assuming that the market doesn't move the 9y swap today should be equal to the 9y swap 1 year from now..Does this make sense or am I being thick about something here...?
 
User avatar
DocToc
Topic Author
Posts: 239
Joined: January 20th, 2010, 9:32 am

swap carry and roll down once more..

January 22nd, 2011, 5:27 pm

This brings me to another question - the payer in a swap is going to lose carry, further he is also short convexity - where is his advantage in a swap?Thanks,Doc
 
User avatar
Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

swap carry and roll down once more..

January 22nd, 2011, 5:51 pm

Looks correct... Who says there has to be an "advantage"?
 
User avatar
DocToc
Topic Author
Posts: 239
Joined: January 20th, 2010, 9:32 am

swap carry and roll down once more..

January 22nd, 2011, 6:12 pm

Well the payer seems to be at an inherent disadvantage in the fact that:He is short convexity and he also always seems to be lose money if the market stays still...i am sure you know but this seems to be a bit of a case like a short gamma short theta case in options..(he loses if the market moves and if the market sits still!)So the swap at outset isn't really fair because of the market is static and/or rallies the payer would lose money..Maybe this doesn't make much sense but let me know your thoughts.. (maybe im missing something small here..)
Last edited by DocToc on January 21st, 2011, 11:00 pm, edited 1 time in total.
 
User avatar
Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

swap carry and roll down once more..

January 22nd, 2011, 9:24 pm

Well, don't you think that the mkt price, i.e. the rate in this case, incorporates whatever asymmetries might exist?P. S. I thought I should mention that Antti Ilmanen's "Understanding the Yield Curve" series of papers talks about this and I can't recommend it highly enough, since it talks about all these things in some detail.
Last edited by Martinghoul on January 21st, 2011, 11:00 pm, edited 1 time in total.
 
User avatar
Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

swap carry and roll down once more..

January 22nd, 2011, 9:25 pm

The convexity is priced into the rate already and is related to volatility. This is why the yield curve may even start going down again at some point in the long end...meaning the payer starts paying less for what you call "disadvantage"..... so it is not really a disadvantage at all, as the mkt will correct for it. 100 year swap will probably have a much lower rate than a 30yr swap due to convexity.
 
User avatar
DocToc
Topic Author
Posts: 239
Joined: January 20th, 2010, 9:32 am

swap carry and roll down once more..

January 23rd, 2011, 11:00 am

ahhhh ok makes sense i have the series of papers haven't gotten around to actually reading them though - thanks for the advice anyway Gmike and Martinghoul!
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On