Negative Carry Cost of A Flattener XCCY Trade
Posted: March 18th, 2011, 1:32 pm
Hi,I know this or variations of this question has been asked before, but I can't calculate the negative carry in the below trading recommendation even after reading them:"We stay neutral local rates in the model portfolio, but with a flattening bias to the curve: Pay 1y xccy, receive 5y xccy at 119bp; target 50bp; stop loss 150bp; negative carry 7bp per month (3m forward spread is 98bp)."Based on this I look at the 5y XCCY rates which is at 8,34% and 1Y at 7,15%. The difference is 1,19%. To be honest I don't know how to calculate the duration of a xccy so I look at the 5Y bond in the market and it has a modified duration of 3,2; and 1Y bond has MD of 0,8. Therefore as an example, I think that in order to be duration neutral I must pay 4,000,000 nominal amount of 1Y XCCY and receive 1,000,000 nominal amount of 5Y XCCY. Where do we go from here to calculate the negative carry of 7 bps? How does the forward spread get into this picture? O/N repo rate is 6,25%.I'd really appreciate if you could recommend some books with practical applications on these topics as well? I check tuckman, fabozzi but can't seem to relate these trading recommendations with what I read there...Many thanks in advance...