Facts, rules of thumb, and intuition for swap spreads

The N-year swap spread is defined as: N-yr swap spread := N-yr swap rate - N-yr government bond yield. Since most quants spend much less time on the bond market than on the swaps market, they often don't come to appreciate the central importance of the swap spread. Here is an unordered list of why … Continue reading Facts, rules of thumb, and intuition for swap spreads →

LIBOR vs LIBID

Everybody talks about LIBOR, and you don't really hear much about LIBID. In fact, the BBA only fixes LIBOR and LIBID is left to free float if you like. The fact is that most banks will need to borrow more than they will need to lend. Or rather, for each investment opportunity they see they will … Continue reading LIBOR vs LIBID →

How to read the FT

Since moving back to a front office seat I have been a keen reader of the Financial Times. Regular reading of economic and finance journalism and analysis is a must if you want to understand the themes discussed around the trading floor. If you have tried and failed to get into the FT, it may be … Continue reading How to read the FT →

Intuition for the forward FX equation

Every quant knows the expression that defines a forward FX rate on date t with maturity T: where B_f is the foreign discount factor and B_d is the domestic discount factor. But what is the best way to explain this intuitively? Here is my suggestion. Let's pick an example pair, say EUR and CHF, and see … Continue reading Intuition for the forward FX equation →

Speaking with a rates trader: cents or bips?

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 … Continue reading Speaking with a rates trader: cents or bips? →

Ito’s product and quotient rules as described by a trader

Ito's product and quotient rules are a corollary of the Ito lemma, and are one of the most important parts of the stochastic-calculus toolkit. When I first started working as a quant I managed to find an alternative form for the rules which sits well in a Black-Scholes type of world and corresponds more closely … Continue reading Ito’s product and quotient rules as described by a trader →