Hi David,
suppose a company wants to judge the hedge effectiveness (by linear regression) of an Interest Rtae SWAP Transaction , where the company wants to assess whether a pay fixed/receive 3- Month Libor interest rate swap could be used to hedge a variable interest expense associated with a prime based loan. If we want to do the assessment by regression method , where for the equation,
Y = aX + b, Y stands for the 'Bid' Libor rates and X stands for the prime rate. My questions are as follows:
1. should we consider the 'Bid' Rates of LIBOR directly and not the daily relative change in the rates as 'Y' variable, and same for the X?
2. should we add any spread to the Libor 'Bid' Rates?
please clarify the doubts.
Regards,
suppose a company wants to judge the hedge effectiveness (by linear regression) of an Interest Rtae SWAP Transaction , where the company wants to assess whether a pay fixed/receive 3- Month Libor interest rate swap could be used to hedge a variable interest expense associated with a prime based loan. If we want to do the assessment by regression method , where for the equation,
Y = aX + b, Y stands for the 'Bid' Libor rates and X stands for the prime rate. My questions are as follows:
1. should we consider the 'Bid' Rates of LIBOR directly and not the daily relative change in the rates as 'Y' variable, and same for the X?
2. should we add any spread to the Libor 'Bid' Rates?
please clarify the doubts.
Regards,
