A
akashgoy
Member
Hi,
Can anyone please help me with an example for the statement given on pg 6 Chapter 19.
" if the swap interest rate curve moves differently to the government bond interest rate curve , this can create a basis risk which could lead to a mark to market loss"
Q. Lets say we have liabilities at time =1,2,and 3.These liabilities are discounted using government bond interest rate curve?
Swap floating payments will be based on the LIBOR and we receive fixed payments to pay the liabilities So the Basis risk is the difference between the government bond curve and LIBOR?
We are uncertain the spread between them might increase?
so this might increase/dec liabilities and the fixed payments received from swap may not be enough?
Can anyone please help me with an example for the statement given on pg 6 Chapter 19.
" if the swap interest rate curve moves differently to the government bond interest rate curve , this can create a basis risk which could lead to a mark to market loss"
Q. Lets say we have liabilities at time =1,2,and 3.These liabilities are discounted using government bond interest rate curve?
Swap floating payments will be based on the LIBOR and we receive fixed payments to pay the liabilities So the Basis risk is the difference between the government bond curve and LIBOR?
We are uncertain the spread between them might increase?
so this might increase/dec liabilities and the fixed payments received from swap may not be enough?