Setting up an interest rate swaption trading desk is a complex endeavor. First, the type of the underlying interest rate should be defined, and it can be either a still existing ibor rate such as EURIBOR or JPY TIBOR or – in the case of LIBOR that has been discontinued as of June 30, 2023 - an equivalent ARR (Alternative Reference Rate) s...
I have covered in quite exhausting detail the mathematical description of an Overnight Index Swap (OIS) in my earlier post about Pricing and Understanding OIS using Excel. Since then, OIS have increased in significance due to the cessation of Libor that affected primarily the USD and GBP currencies to the effect that today hardly anyone still trade...
The pricing of exotic interest rate products cannot ignore the so called market volatility cube that is made daily available by several swaption brokers. Traders often use the SABR Stochastic volatility model in order to estimate vols off the provided grid. In this article I will show you how to price an out-of-the-money swaption by applying SABR c...
With this article I want to give you an intuitive feeling of the concept of interest rate and also show you how to work with various types of interest rates – such as a compounded interest rate - in Excel as accurately as market professionals do. Table Of Contents The Primitives: Time and Money How did our prehistoric ancestors measure...
Building, pricing and analyzing even non-standard interest rate swaps in Excel becomes a simple exercise when the Deriscope interface to the open source QuantLib analytics library is employed. We have already encountered a simple interest rate swap contract in the Yield Curve Building in Excel using Swap Rates article, where vanilla swaps were used...
Most people are unaware of the fact that free and open source QuantLib comes with a great variety of modelling approaches when it comes to pricing an interest rate European swaption in Excel that surpasses what is offered by expensive commercial products. In fact, 14 different modelling approaches are implemented, whereby the Black approach does no...
The Chicago Mercantile Exchange (CME) clears European swaption trades on 3-month USD LIBOR since April 2016 and has thus become the first major exchange that lists Over-The-Counter (OTC) interest rate products with optionality. The standardized swaption contracts have 5 different expiries - 1M, 3M, 6M, 1Y, 2Y – and 7 underlying swap tenors - 1Y, 2Y...
Overnight Index Swaps (OIS) may be priced in Excel using the free and open source derivatives analytics QuantLib library through the Deriscope Excel interface. Table Of Contents Overnight Index Swap (OIS) Description Mathematical Calculation of the OIS Present ValueCreating a 5-year OIS object in Excel in less than 18 seconds Gett...
Up until the financial crisis of 2008, the price calculation of an interest rate swap involved only the so-called Libor curve. The latter was essentially the discount factors (or equivalently zero rates or forward rates) implied by market-traded instruments, such as deposits, futures, forwards and swaps. The Libor curve was used to derive everythin...
In this post I will make use of the realistic yield curves I built in Excel out of Bloomberg OIS, deposit, futures and Libor swap rates as of May 22, 2019 towards calculating the price and producing the detailed cash flows, flat DV01 and maturity-dependent DV01s of a bespoke forward starting 3-year swap. You may want to visit the respective article...
In my previous post about USD Interest Rate Swaps in Excel, I explained how to calculate the price and risk of a single USD interest rate swap using actual market data from Bloomberg as of 22 May 2019. In the current post, I will make use of the same market data to calculate the prices and DV01s (both flat and bucket) of two different swap collecti...
In my previous two posts I have shown how to calculate the price and DV01 of a single interest rate swap and how to do so with a book containing thousands of swaps. Now I turn my attention to the calculation of the Carry and Roll-Down of a single swap. Table Of Contents Carry and Roll-Down Definition Deriscope Computation Method Bloomberg Ma...
Until the 2007-08 financial crisis, forward interest rates of any tenor had been calculated off one single yield curve. In the US, traders had been building one USD yield curve out of market-traded deposits, futures and fixed-to-3M-Libor swaps and used that curve for all purposes involving interest rate calculations, such as extracting discount fac...
Last week I described the unique problem faced by interest rate swap traders when the collateral is kept in a currency different than the one where the swaps are denominated. You may want to visit that post for details on how the appropriate discounting (basis) curve in the Mexican case is constructed out of several market rates that include t...
In my post about USD Interest Rate Swaps in Excel, I have explained in detail how to calculate the price and risk of a single USD interest rate swap using a multi-curve approach and actual market data from Bloomberg as of 22 May 2019. A comparative analysis between the single-curve and multi-curve approach has been laid out in my post focusing on s...
In one of my earlier posts I have shown how to use Deriscope to calculate the Carry and Roll of a single interest rate swap. In the current post I will describe the Profit and Loss (PnL) as a mathematical quantity that is defined in a way like that of the Carry and Roll-Down. Table Of Contents PnL Definition and Relationship with the C...
Today, the sum of the notional amounts of all financial products referencing the USD LIBOR is estimated to $400 trillion. These are diverse products ranging from derivatives such as interest rate swaps to consumer products such as student loans and home mortgages. About $170 trillion are in outstanding swaps, of which one third have maturities beyo...
In an earlier post with the title Trading Blotter and Book Risk Management of USD Interest Rate Swaps in Excel: Example of a Book with 10,000 Trades, I explained how to calculate the price and risk of a fictitious portfolio of up to 10,000 vanilla fixed-to-floating USD interest rate swaps that all involved the 3-month USD LIBOR index. Apart from th...
Everybody these days seems to ask the same question: On D-Day when LIBOR will cease to exist and pricing will rely solely on risk-free reference rates like SOFR or SONIA and the Spread Adjustments published by Bloomberg, what will the impact on portfolio pricing be? The mechanics of pricing a single USD interest rate swap with and without the ISDA-...
I have discussed the generic concepts of Carry and Roll-Down in relation to the expected cash flows of any financial instrument in my post titled Carry and Roll-Down of USD Interest Rate Swaps in Excel with Bloomberg Comparison. The emphasis there was placed on their absolute (dollar) definition and a USD Libor interest rate swap was used as exampl...
