Asset swap spread
In a par par asset swap, what discount rate should be used to value both legs? there's literature on computing asset swap spread using LIBOR/zero curves but there are also some that use swap curves (bloomberg as well). can someone please enlighten me. thanks!
You're a bit confused...
The choice of rate used to discount the derivative cashflows is one issue. The choice of the index curve (e.g. LIBOR) is a different one. Furthermore, the swap curve IS the LIBOR curve.
Hi Martinghoul, I'm new to fixed income and apologies for confusing the terminology etc. let's assume we're looking at a simple fixed-float USD in this asset swap scenario. when you say the index curve i'm assuming you're referring to the curve used to calculate the floating leg? i think market convention is 3m LIBOR, quarterly reset.
My original query was in regards to the rate used to discount the derivative cashflows. i read that the cashflows are discounted by zero coupon rates while i see on bloomberg that the swap rates are used. Hence, my confusion.
Lastly, could you please elaborate on what you mean by the swap curve is the libor curve? What i understand is that the swap curve is derived from plotting par swap rates against their time to maturities. Is this incorrect?
Sorry for the bombarding you with questions and thank you for taking the time to reply!
Please ignore the last point. Sorry I understand now, LIBOR rates are the shorter term rates on the swap curve.
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