interest rate swaps and swaptions

i have an interview for an interest rate derivatives middle office role. i would appreciate any help for the below questions that i've received in past middle office interviews (but bombed)"

1. How do you calculate the P&L for interest rate swaps?

2. How would you hedge a swaption?

3. How would you construct a Libor curve?

Any help would be great!

Thanks

These are all heavy subjects... I think books are the best place to find answers. Try "Fixed Income Securities" by Tuckman and/or "Swaps and Other Derivatives" by Flavell. If you have more specific questions, ask and I shall try to answer.

thanks martinghaul. i will check out those books. as a rough estimate, i was told the following answers and would appreciate your thoughts:

1. the delta of the swap expressed in bpv's multiplied by the basis pt move in the swap curve will give you a rough P&L

2. if you are long the swaption, you can hedge by shorting the underlying swap.

3. to build a libor curve, you can take yields of the most liquid and "risk-free" products for the different tenors (i.e. cash for 3 months, treasures for 1 yr, etc)

thanks again!

1. Yes, that's correct.
2. No, that's not correct, as it depends on what sort of swaption you're long. If you're long a payer, you'll have to receive (fixed) on the underlying swap to hedge (positive DV01/delta). If you're long a receiver, you'll have to pay (fixed) on the underlyng swap to hedge (negative DV01/delta).
3. Sort of correct. However, to build a LIBOR curve you certainly should avoid using treasuries. LIBOR curves are built out of LIBOR instruments, such as deposits, Eurodollar futures and swaps.

much thanks!