Swap curve trading strategies
Placing trading positions based on par curves creates exposure across the entire yield curve up to the term of the traded instrument. The availability of Eurodollar futures goes a long way in solving this problem and allows a trader to place bets on his view of expected forward 3-month Libor rates. At this time, Euros are traded out to 10 years, though only the contracts out to five years are relatively liquid. Previously, to place yield curve trades required the use euro futures combined with spot and forward swaps.
These trades were restricted to funds with access to the swap market. Trades could be placed using Treasury Bond futures but with the risk of swap spreads fluctuating. With the advent of IR Swap futures a few years ago, yield curve trades became accessible to the retail investor. It is now possible for virtually anybody to place positions with a view of likely changes in the shape of the yield curve.
An alternative method uses the concept of continuous forward rates. It also produces a more pronounced description of forward yields with a richer structure that may be hidden when solely depending on par or zero curves. My swap curve trading strategies strategies are based on an instantaneous forward rate curve built using the Eurodollar futures strip combined with swap curve trading strategies 5, 10 and 30yr USD Interest Rate Swap futures contracts. Since the Euros trade out up to 10 years, the 5 and 10 yr Swap futures are simply used to confirm the robustness of the curve construction.
The 30yr Swap futures price is used to fit the curve from 10yrs out to 30yrs. The ongoing interventions by the Fed in maintaining an almost swap curve trading strategies short rate while buying back treasuries across the longer term periods has created an extremely humped forward curve. A similar shaped forward curve was seen in the Japanese market in the early s when the Japanese injected liquidity into its bond market by bringing its short-term lending rate virtually to zero for an extended period of time.
This profitable trading opportunities created by the humped shape will eventually force the curve to return to a normal shape. The downside to the trade is that a trader needs to remain cautious when putting on the intended position as market interventions may continue to make the curve even more humped. This situation creates even more profitable trading opportunities, but may force the trader out of his swap curve trading strategies if he has under-allocated margin resources to sustain intermediate losses.
There are various trading techniques and money management methods which can be used to minimize the chances of being forced out of the trade while balancing the profitability of the trading opportunity. With this analysis system, I am able to build forward rate curves calibrated to euro prices and swap futures prices. Different portfolios consisting of euro and swap futures positions can be analysed for their carry income, potential profit upon reversion to a normal curve as well as maximum potential intermediate loss.
My system assumes a step continuous forward rate curve swap curve trading strategies to Eurodollar prices having adjusted for futures vs forwards. The forward curve out from 10yrs to 30yrs is smoothly fitted by a cubic spline calibrating to the 30yr swap futures price.
The 5yr and 10yr curve implied swap prices are computed and compared with the swap futures prices. The 5yr swap rates fit within bp and the swap curve trading strategies swap rates fit within bp. This is well within bid offer spreads of the euros and swap futures not any possible arbitrage. Of course the 30yr implied swap futures price fits exactly, as it has been used for calibration of the curve. The forward curve is nudged by a continuous 1bp move upward per forward date interval matching the swap curve trading strategies future 3mo periods.
The sensitivities of the Euro future contracts as well as the swap futures contracts are calculated. I have also built a theoretical curve model to analyse the impact on portfolio positions of various curve shifts, i. Swap curve trading strategies allows for the analysis of various portfolio strategies and how one could maximize carry swap curve trading strategies, profit from curve reversion or minimize possible loss from curve diversion, etc.
I have developed a simple system of computing the portfolio exposure graphically versus the yield curve to aid in trading strategy analysis. These models and spreadsheets are in the development stage, therefore I would like to apologize for their lack of elegance and lack of usability and user protection.
A few sample pages of the spreadsheets have been attached. I welcome any further discussion regarding any of the calculations, techniques and assumptions used in the development of these systems and the application of the same to yield curve trading strategies. Read over testimonials from satisfied swap curve trading strategies, parents and students.
Both tutors and swap curve trading strategies centres advertise with us, with many tutors also offering online tutoring for numerous subjects. Join and get a free ebook! Please log in to see tutor details Subject: Banking and Finance Last updated: Technical Description of Forward Curve Analysis System My system assumes a step continuous forward rate curve fitted to Eurodollar swap curve trading strategies having adjusted for futures vs forwards.
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