Help! Basic question on Libor 1-3 basis …

[GavinSmith]

Hi Risk Community,

Working on a project and I can use some help.

Case Facts

• Company is paying lenders fixed on short and intermediate term debt.
• 
  
• Company, then converts fixed exposure to 1 month Libor float with the Dealer community. That is, company is a fixed-rate receiver and paying 1m Libor float (interest rate swap reference rate = 1m Libor).
  
  
• Monthly resets and payments on the floating leg.
  
  
• Standard debt semi-annual reset and payment on both the underlying debt and the swap fixed leg – perfectly matched
  

Given – 1m Libor is deduced from the standard/published 3m curve through the basis spread adjustment. Understood.

Questions –

(1) Is the company directly exposed to the 3 month Libor?
(2) In this scenario - debt hedged with 1m float IRS - would the 1-3 basis spread be a P&L driver?

I am thinking the sole exposure is 1m Libor, correct?

Thanks for your help. Any guidance will be greatly appreciated.

- Gavin

 

[ami44]

Hi Gavin,

These are valid questions, but in my experience they do not have a clear answer.

From the three market data
- 3M forward curve
- 1M forward curve
- 1M/3M basis spread
only two are independent and the third can be derived from the other two.

Since 3M is the most liquid tenor you would always consider the 3M forward curve as independent market data. But from my experience the other two are up for discussion.
A 1M forward curve below 1 year is normally build using the 1M libor and FRAs. These are genuine 1M instruments. But above a year often the 1M curve is derived from the 3M curve and quotes for 1M/3M basis swaps. This would suggest, that the basis spread is the independent market data.

So its up to you to decide, if in your example you have a 1M risk or you have a 3M risk and also a 1M/3M basis risk.

In the above I neglected basis risk that might originate from the discount curve, since you don't seem to be overly concerned with that.

Did that make sense to you?

 

[Ash124]

Hi. Urgent question. Where do I get the 1M/3M Basis spread apart from Bloomberg?

1.) I derived the 3M LIBOR curve and wish to get the 1M LIBOR curve from the same. Can anyone recommend a source for 1M/3M Basis Spreads?

2.) I know that initially (<1year), I'll need to use 1 month LIBOR rate and FRA rates for the same. Can someone also tell where and how I can get these FRA rates?