Interpreting Carry and Roll-Down in Interest Rate Swaps
Summary
This discussion clarifies how carry and roll-down are defined for a receive-fixed interest rate swap. It questions a description of upfront carry as the difference between present values of current and forward-starting swaps, since those values depend on the rates used to value them. Under the stated assumption that the current swap is at mid-market and the forward swap is valued against the ten-year mid-market rate, the calculation corresponds to the present value of cash flows received in the first year.
Running carry is described as upfront carry normalized by the PV01 of the forward-starting swap, making it a risk-scaled measure. The exchange does not provide a full derivation, market data, or a general valuation framework, and the response cautions that the source definition may be misleading. The discussion is useful chiefly as a reminder that carry measures depend on valuation conventions and should be defined precisely before comparing trades.
Key ideas
- Upfront carry depends on the rates and valuation conventions used for both swaps.
- Under the stated assumptions, upfront carry corresponds to the present value of first-year cash flows.
- Running carry divides upfront carry by the PV01 of the forward-starting swap.
- A risk-scaled carry measure does not by itself establish that carry is a useful trade-selection signal.
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# Trading Jargon - Interest Rate Swaps / Bond Trading # Trading Jargon - Interest Rate Swaps / Bond Trading I was going through some reports but having hard time with the jargon. When I google them online I came across the page: http://volcurve.blogspot.com/2007/10/carry-and-roll-down-back-to-basics.html Unfortunately it is not updated anymore. I am having hard time to understand definitions in the link above. For example: Does this mean Upfront Carry Return is equal to 10Y Swap Fixed Rate (SFR) - 1Y9Y Forward Swap Fixed Rate? If not, please tell me what is it? - Upfront roll-down: For a 10-year receive fixed swap, the 1 year roll-down is the net present value of a 10-year swap and less net present value of a 9-year swap today. Same for this. Is Upfront Roll Down Return equal to 10Y SFR - 9Y SFR? And complete other story is: - Actual Vol-adjusted Running Carry & Running Roll-down: 1Y Running Carry divided by the actual volatility of the 1Y rate over the past 1 year. Is 1Y rate the reference rate in floating rate or 1Y swap rate or something else? Really appreciate your help on this and would be grateful if you tell some about this kind of jargon explaining documents/papers/pages. Cheers! ## Answer by Attack68 (score 3, accepted) https://quant.stackexchange.com/a/43910 Further to my comment the link you posted contains useless information. `**Upfront Carry**: For a 10-year receive fixed swap, the 1 year carry is the net present value of a 10-year swap less the net present value of a 9-year swap starting 1 year from now.` What is net present value (npv) given there is no mention of rates. Let's assume that the 0Y10Y swap is valued relative to mid market so its NPV is zero, and the 1Y9Y is valued relative to the 10Y mid-market rate. A simple mathematical calculation shows that the author is equating upfront carry to the present value of the cashflows receivable in the first year of the 10Y swap. `**Running Carry**: the Upfront Carry divided by the PV01 of the forward starting 9-year swap.` So if the upfront carry was something you genuinely believed to be a useful means of assigning value to a trade consideration running carry normalises that metric by factoring risk. Please avoid using that link and consider instead the answers here: Carry calculation on an interest rate swap
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