Friday, April 20, 2018

fixed income - Carry calculation on an interest rate swap


I was hoping that I can get help on a simple yet not so straight forward topic :


Looking at valuing the costs of holding an IRS in the books this would entail marketed-to-market due to price movements in addition to Carry & roll down.


My question is specific to Carry of an interest rate swap.



On an IRS there would a fixed leg and a floating leg, assume that we are running a 5 year IRS where we are paying a USD fixed rate quarterly and receiving 3m Libor floating quarterly .Assume 5y spot rate is 2% & 3m libor is 1.3%


Intuitively the 3 month carry would be (spot rate - libor ) , in our case 2%-1.3% quarterly


My question is why is it to calculate carry the following is used instead:


Carry = forward rate - spot rate


In our case (4.75 years IRS starting in 3 months) - ( 5y spot rate )


please explain to me like I'm a 6 year old


Any links or txt that you can provide would be appreciated


Kind Regards




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