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marym

Prime Rate - Index Maturity

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Anyone have a suggestion on appropriate idx maturity (Intswap3) to use for Prime?

 

I would think daily, but just wanted to check.

Thanks :unsure:

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Good question.

 

Mind if I rephrase it?

 

What would be the appropriate idx maturity for a degree day swap? I pay you Libor plus 4, and you pay me the average daily high for Miami divided by 10, averaged every day for the quarter.

 

Ideally, you really would like a model that will let you enter the expected temperature for Miami going out as far as the swap; a range with dates and expected temperatures. But IntSwap3 wants a yield curve, preferably a set of discount factors. It will internally call into IntQuote to get the expected "rate" on each observation date of the swap, using the idx mat you supply.

 

So the first step is to create a set of discount factors which will imply the correct temperatures. Part of the work involved in doing this reverse of Intquote is to tell it what the idx mat is. And sure enough, BasisCurveGenF, the routine that does this calculation for you, asks for an idx mat. So I'd suggest that by using the same value for idx mat in BasiCurveGen and IntSwap3, almost any value should work just about equivalently well.

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