Thank you very much for the video. I am a lawyer and though as lawyers we don't need to go so deep when we deal with swaps, understanding the underlying functioning is quite useful!
Thank you. I have spent hours trying to figure out how to price it and I couldn't figure out how the floating rate bond is worth only one cash flow. duh!
Because those LIBOR rates represent the market rates that the fixed income bond (fixed payment side of the swap) must be based upon for valuation purposes
Hi David! Thanks heaps for the video. It was really concise and to the point. Can you please put the excel file here as well? Cause in the other videos, sharing the excel file helped a lot. Cheers
Thanks for the video! When looking on Bloomberg on a swap calculator, there is a DV01 per leg, but only one PV01. Can you discuss the differences here?
Thank you David, Can you give brief clarification on how to calculate daily floating and fixed legs values? i use to evaluate daily PnLs so i would like to know how to calculate them on a daily basis with using of LIBOR. take any of example and give me.
Thank you for the uploaded video. My question is: why did you state that the floating rate bond in 3 months (that is the PV of all future cashflows by then) will be equal to the par value?
Hi David! I am confused with your discount factors. Can you explain please why do you use continuous compounding? It's unrealistic, isn't it? In your example there is a semiannual compounding, should not your discount factor be like 1/(1+libor/2)^(n*2)?
Hi kiril, if we read an assumption given like "15-month LIBOR is 3.4%", it is insufficient because we aren't given the compound frequency (this is Hull's question, btw). We could be told (eg) that the rate is "15-month LIBOR is 3.4% with semi-annual compound frequency" in which case your formula would apply! But if we are told that "15-month LIBOR is 3.4% with continuous compound frequency" then we retrieve the discount factors with continuous discounting, because it's a FEATURE of the given rate. The advantage of discount factors is that "they do not lie" because they don't need compound frequency assumption (they've already embedded it). In this way, the reason (to answer your question) is that compound frequency is part of the definition of a nominal (aka, stated) rate. A nominal/stated rate is imprecise without it, b.c 3.4% s.a. and 3.4% cc are (slightly) different rates. I hope that's helpful!
Thank you David for your answer. But usually what compound frequency for Libor is implied? I mean if I open swap manager in Bloomberg I will enter parameters of the swap and I can see the Libor curve, but how to understand what frequency is used for pricing? I tried to replicate swap from Bloomberg in excel many times, and I failed so far. Still cannot grasp it. Academic way of explaining is way easier than the way it really works. Any advice is appreciated!
