I have a peculiar deal where the payoff is calculated as 6 month GBP Libor - 6 month CHF libor. My gut feel says that it cannot be a normal mathematical subtraction. an anybody throw some light one the concept?
Wouldn't this be a portfolio long a GBP Libor FRN and short a CHF Libor FRN of equal face values? I believe the time-0 price of a FRN issued now is equal to the face value. (The price obviously would change as time passes), so I think the PV of this deal should be 0 since the face value cash flows cancel each other out.
(Trying to show off my fixed income knowledge from a course I just finished...I may be WAY wrong!)
No this is the floating leg of the cash flow where payoff is 4*Reference spread where reference spread is defined as 10 year GBP swap rate - 6 month CHF Libor.
Given that this is a some sort of swap deal, and the floating leg is 6M GBP Libor - 6M CHF Libor, you are going to have to sort several things out here, for example:
1) what is the fixed rate;
2) what is the payoff "4*Reference spread where reference spread is defined as 10 year GBP swap rate - 6 month CHF Libor";
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