Backtesting Interest Rate Swaps ?
Author: Ben_Zurich
Creation Date: 11/9/2013 7:37 AM
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Ben_Zurich

#1
Has anybody every looked into how we could model the backtesting of interest rate Swaps?

For this, the following data series are needed:

the Swap spread data series (e.g.: 6m vs. 10year EUR swap).

The current 6m Interest rate.
The current 10yr interest rate.


As one enters the Swap, there is no security bought or sold, but the following happens:

1) two cashflows start to run and need to be accrued: the one that the trader receives and the one that the trader has to pay out.
2) upon closing the Swap ("selling" it), the trader receives (or has to pay out) the Present Value of the opposite swap.

Could this (and how could this) possibly be modeled in Wealth-Lab, and also used with optimization ?

Any ideas?



A note:
to correctly calculate the Present Value, one needs to discount the cashflows for each particluar year with respective rate from yield curve (i.e., for a 10-year swap, one would need to have 1yr, 2yr, 3yr, 4yr, -... - 10yr interest rate to discount).

So the calculations of the Swap and its different cashflows and its present value (for closing it out) would have to be based upon the following data series:
6m Rate
10yr Rate
1yr rate
2yr rate
3yr rate
[....]
10yr rate.

Anybody else here who would be interested in programming a "Swap Trader" extension?

All the necessary data can be downloaded from Bloomberg.
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Ben_Zurich

#2
It is also important to note that by entering an IR Swap, no security is bought or sold.
it is just upon closing the contract again that a cashflow (related to the exposure traded) is being exchanged, consisting of the cashflow received, the cashlfow to be payed, and the present value of the "opposite" swap trade that is being used to "close" the IRS again.

So I assume this would pose some problems for WL current trading module?

We also would only use "external" data series and indicators caclulated on these in order to generate trading signals, not trading signals on the price or value of the IR Swap itself.