Tim Olson
47471b7700
- Flink update_bars debouncing - update_bars subscription idempotency bugfix - Price decimal correction bugfix of previous commit - Add GLM-5.1 model tag alongside renamed GLM-5 - Use short Anthropic model IDs (sonnet/haiku/opus) instead of full version strings - Allow @tags anywhere in message content, not just at start - Return hasOtherContent flag instead of trimmed rest string - Only trigger greeting stream when tag has no other content - Update workspace knowledge base references to platform/workspace and platform/shapes - Hierarchical knowledge base catalog - 151 Trading Strategies knowledge base articles - Shapes knowledge base article - MutateShapes tool instead of workspace patch
3.1 KiB
3.1 KiB
description, tags
| description | tags | ||||||
|---|---|---|---|---|---|---|---|
| Swap spread arbitrage takes a long (short) position in an interest rate swap versus a short (long) position in a Treasury bond of the same maturity, profiting from the difference between the swap rate, Treasury yield, LIBOR, and the repo rate. |
|
Swap Spread Arbitrage
Section: 5.15 | Asset Class: Fixed Income | Type: Arbitrage / Rates
Overview
The swap spread arbitrage is a dollar-neutral strategy that combines a long (or short) position in an interest rate swap with an offsetting short (or long) position in a Treasury bond of the same maturity. It profits from the spread between the swap fixed rate and the Treasury yield, net of financing costs (LIBOR vs. repo rate). The strategy is essentially a bet on the direction of LIBOR relative to the repo rate.
Construction / Mechanics
Instruments:
- Interest rate swap: receive fixed rate r_swap, pay floating LIBOR L(t)
- Treasury bond: short the bond (financed at repo rate r(t))
Per-dollar-invested P&L rate:
C(t) = ±[C_1 - C_2(t)] (418)
C_1 = r_swap - Y_Treasury (419)
C_2(t) = L(t) - r(t) (420)
where:
- C_1: constant spread = swap fixed rate minus Treasury yield (the swap spread)
- C_2(t): floating spread = LIBOR minus repo rate
- Plus sign: long swap strategy (receive fixed, short Treasury)
- Minus sign: short swap strategy (pay fixed, long Treasury)
Long swap strategy (plus sign):
- Receive r_swap (fixed leg of swap) + short Treasury (financed at repo) → pay Y_Treasury + repo rate
- Profitable if C_2(t) = L(t) - r(t) < C_1
Short swap strategy (minus sign):
- Pay r_swap (fixed leg) + long Treasury (funded at repo) → receive Y_Treasury
- Profitable if C_2(t) = L(t) - r(t) > C_1
Payoff / Return Profile
- The long swap strategy profits if LIBOR falls (C_2 decreases below C_1).
- The short swap strategy profits if LIBOR rises (C_2 increases above C_1).
- This is fundamentally a LIBOR bet: the trade profits or loses based on the LIBOR-repo spread relative to the constant swap spread C_1.
Key Parameters / Signals
- C_1 = r_swap - Y_Treasury: the swap spread (constant at trade inception)
- C_2(t) = L(t) - r(t): the LIBOR-repo spread (time-varying)
- Net P&L driver: ±(C_1 - C_2(t)); direction depends on long vs. short swap position
Variations
- Adjust maturity of the swap and Treasury bond to target different parts of the yield curve.
- Pair with CDS basis trades for multi-leg credit/rates arbitrage.
Notes
- The strategy is dollar-neutral (the swap and Treasury position offset each other in notional terms).
- LIBOR risk is the dominant risk: unexpected changes in LIBOR (e.g., central bank policy shifts, bank credit stress) directly affect P&L.
- The repo rate r(t) can vary and introduces additional uncertainty in C_2(t).
- With the transition away from LIBOR to SOFR and other risk-free rates, the mechanics of this strategy are evolving.
- Counterparty risk on the swap and margin requirements must be accounted for in practice.