Best Thread STIR's from Scratch

SM_1 said:
good to hear, I just fear there will come a time(if not already) where it will just be super-fast computers battling it out, making trades before the human eye can even register whats going on. Read stories about flash crashes all the time and weird things that are going on, seems more and more like supply and demand are no longer the driving factors. Hope I'm wrong.
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Super fast computers have been battling it out since there was computers. Of course supply and demand are factors, you have been reading too much conspiracy theories written by disillusioned failure traders trying to find an outlet to push their political ideologies.

These computers arent so bad, you can make huge money off them if the people behind them are slow to update things.... and they are because they cannot feel the market like a purely discretionary trader can.... but in any case, most of these computers are battling it out with each other to give YOU the best price on any order you put in anyway
 
Interesting, outright or spreading? What ones mainly? reading the order book?
 
Pricing of STIRs

Hi Everyone,
I am trading in short streling market since last 1 year.
I have a question reagrding pricing of these futures.
In Aikin book the pricing was done using Term deposit rats til 1year i.e white strip & then to construct a zero curve using swaps .

Q1. Is there any active interbank unscured term deposit market for maturities from 3 months to 12 months where banks are actively providing quotes, if yes how can i see this on Bloomberg, and are whites priced from these as book says?

Thanx
 
I looked at BTMM page on Bloomberg for UK markets, there is a column of Depo rates but Bid/Offer is wide.
I am taking todays LIBOR fixes for steling 3month .8250 & 6 month 1.10188 to calculate 3month forward rate after 3 month
1 GBP after3 month = 1+ .8250/100*90/360=1.002063
1 GBP after 6 months= 1+1.0188/100*180/360=1.005509
3X6 rate should be (1.005509/1.002063-1)*360/90*100=1.375922


So theoretically SEP 11 contract which expires around 3 month time should trade around 98.62

what am i missing here?
 
You're missing the basis... You can't do the calculation that you're doing the way you're doing it.
 
Martinghoul,
If i am correct Basis is the difference between futures market price & theoretical price.
It seems to me that market participants are not pricing front contracts based on depo rates, if not then how do they price white strip of STIRs?

Can you elaborate a little please.

thanx
 
No, in this particular context I am referring to the 3s6s basis. Essentially, you cannot perform the fwd rate calculation using two rates with different underlying terms. You can use the 3M depo and the 3x3 FRA, for example.
 
Martinghoul said:
No, in this particular context I am referring to the 3s6s basis. Essentially, you cannot perform the fwd rate calculation using two rates with different underlying terms. You can use the 3M depo and the 3x3 FRA, for example.
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Whats a 3s6s basis?
Why cant i perform forward rate calculation using two rates with different underlying terms( atleast thats what Aikin did in his book)?
Why would i need a FRA( did u mean 3x6) to calculate forward rate since FRA itself is a forward rate?
 
STIRNoob said:
Whats a 3s6s basis?
Why cant i perform forward rate calculation using two rates with different underlying terms( atleast thats what Aikin did in his book)?
Why would i need a FRA( did u mean 3x6) to calculate forward rate since FRA itself is a forward rate?
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Yes, sorry, I obviously meant 3x6 FRA...

3s6s basis is the spread between a rate implied by a 3M curve (curve generated out of 3m instruments) and that implied by a 6M curve.

The fwd rate formula is based on some implicit assumptions about the "risk premium" embedded in the rates used. These assumptions were taken for granted pre-crisis, just 'cause it was more practical to do things that way. In reality, they have actually never held in the mkt, but it became particularly clear during and in the immediate aftermath of the crisis. So nowadays nobody would dream of doing what Aikin is doing (caveat: I have never read his book).
 
short sterling futures are simply the 3m forward rates plus the 3m credit risk (i.e FRA-OIS spread). Pre crisis people used the short sterling strip to calculate what the 6m forward rates, 8m forward etc. In their caclulation they used 3m credit risk by doing this because embedded in each sterling contract is jus 3month risk, even the Jun12 sterling contract only has 3m credit risk in it because the contract is based on borrowing money for only 3months not 1yr. The short sterling/euribor/eurodollar strips are not part of the yield curve, they are forward curves.
 
Agreed that one cannot calculate forward rates using two rates with different terms & when thinking from lenders point of view this makes sense.
Then how does market price the White strip of STIRs, Is market using FRAs price ?
 
STIRNoob said:
Agreed that one cannot calculate forward rates using two rates with different terms & when thinking from lenders point of view this makes sense.
Then how does market price the White strip of STIRs, Is market using FRAs price ?
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Well, you first build a SONIA curve, then you apply the 3m FRA/SONIA spread and then voila... In general, it's hard to determine what's the chicken and what's the egg in these things. Things trade in the mkt and that's how the price gets discovered.
 
So basically one starts with OIS curve ( which has less risk) & add the risk from FRA market which is similar to STIR futures in that both are expectations of forward LIBOR rate.

What i am trying to find out is what causes orderflow in STIRs outrights.
e.g if a contract is Bid 7000 lots & offerred 500 lots & somebody hits bid with 1000 clip, whther he is an algo or not ( i dont know) , but mostly these big clips prove to be right & they hit outrights in certain order based on where spreads & flies are.

What i wnat to know is origins of this orderflow?

Also any idea which of these markets is bigger in size & importance (OTC or futures).


Edit: As i was typing a 15K clip hit in SEP 11 Sterling offer.
 
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STIRNoob said:
So basically one starts with OIS curve ( which has less risk) & add the risk from FRA market which is similar to STIR futures in that both are expectations of forward LIBOR rate.

What i am trying to find out is what causes orderflow in STIRs outrights.
e.g if a contract is Bid 7000 lots & offerred 500 lots & somebody hits bid with 1000 clip, whther he is an algo or not ( i dont know) , but mostly these big clips prove to be right & they hit outrights in certain order based on where spreads & flies are.

What i wnat to know is origins of this orderflow?


Also any idea which of these markets is bigger in size & importance (OTC or futures).
Click to expand...
Hard to generalize too much...

You want to know where the real flows come from, rather than speculative ones? In sterling a lot comes from the mtge mkt, as well as banks hedging their other loan books...

The OTC mkts are generally, bigger because there's a bigger variety of products you could trade there.

And as to the Sep11 clip, that, I'm sure, is related to a LIBOR/OIS view.
 
You mentioned banks hedging their loan books & activity from mortgage markets.My conjecture is that both these group of players will be hedgers & will always hit at market.
If the majority trading volume is hedgers' then activity in their markets ( whatever they are , i only know FRAs & swaps) will drive majority of orderfow in STIR futures.

Is this line of thinking correct?


Can i see the pricng as you mentioned on Bloomberg?
 
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