As everyone knows:
one basis point is 0.01%, and one cent is 0.01% too.
The difference is that we typically use cents when we refer to an upfront price, and use bips when we refer to a rate (in a swap for example).
So a trader may ask:
“what is 3 bps worth upfront?”
which means you should change the rate by 3 bps (in the direction that makes the PV of the trade positive to your trader) and see how much the PV changes. If the change in PV is 0.15% then you’d reply:
“3 bips running is worth 15 cents upfront”.
[ By the way, you could have said: “3 bips is worth 15 cents”, but the two little words running and upfront make sure it is very clear what you mean, and it is always important to minimize the chance of being misunderstood. ]
5 thoughts on “Speaking with a rates trader: cents or bips?”
Hi, sorry a very stupid question here (I’m an intern atm) – what do you mean by ‘upfront’ and ‘running’ exactly?
‘Upfront’ means that you pay an amount (of cash probably) in one go at the start. A ‘lump sum’ might be another way to describe it.
‘Running’ means that you do not pay an amount upfront, but instead pay an additional amount with each coupon payment.
For example, in a zero-rates environment you would find that $10 paid upfront has the same value (the same PV, that is) as $1 paid ‘running’ for ten years. This is because the zero interest rates imply that each of the ten $1 payments have a PV of $1 and therefore sum up to a PV of $10 in total.
Could you elaborate on the term “running”? Perhaps using a simple interest rate swap example.
Sorry for the late reply, I just added a little explanation in a comment. I hope it will help.
Thiss was great to read