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Interpreting EUR Forward-Rate Curve Fly Trades

Article Quant Q&A · Author: Bravo
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Summary

The document explains the notation for a EUR trade combining three forward-starting interest rates with different start dates and tenors. It identifies the position as a curve fly, where the intermediate point is the belly and the shorter- and longer-term points are the wings. The stated intuition is to sell the wings and buy the belly, aiming to benefit when the belly rate rises more quickly relative to the two wing rates.

The response treats the trade as analogous to other curve-fly structures and points to a related example in the research material. It does not specify trade weights, conventions, hedge ratios, or whether the legs are sized to neutralize particular risks. Consequently, the description supplies a directional relative-value intuition, but not a complete implementation recipe; those details depend on the instrument and the source’s trade construction.

Key ideas

  • A three-point forward-rate position can be interpreted as a curve fly with a belly and two wings.
  • The forward rates can have different start dates and tenors while still forming a fly structure.
  • Paying the belly and receiving the wings benefits when the belly rate rises relatively faster.
  • Trade weights and risk hedges are not specified and must be checked in the original construction.

Tags

Fixed incomeFuturesCarry
Full text
# What does EUR 5y2y-7y3y-10y5y mean?


# What does EUR 5y2y-7y3y-10y5y mean?












In this research piece, one of the trades on Page 31 is Pay EUR 5y2y-7y3y-10y5y. What is the meaning of this notation? I guess it is a fly trade on three forward rates, but it is confusing that the three rates have different starting dates (2y vs 3y vs 5y). What is the intuition behind choosing such flies?

## Answer by AKdemy (score 4)

https://quant.stackexchange.com/a/75901

You can have a look at the fly in nordea.

It's the same logic, just different tenors. If you google paying the belly you also find info. Essentially, by selling the short- and long-term (the wings) of the yield curve and buying the medium term (the belly) at the same time, you gain if the medium-term rates increase relatively faster than rates on the other two.

Your research paper also has a similar strategy (10y5y-15y10y-25y5y) which is explained in more detail (exhibit 27).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.