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Pricing Multi-Instrument Swap and Futures Packages

Article Quant Q&A · Author: low_snr
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Summary

The document asks what defines a package trade in rates markets, whether a package must be DV01-neutral, why hedge funds request one, and why it may be hard to price. Its example is a set of instruments traded together to target exposure around a particular FOMC date. The central pricing question is whether individual instruments can simply be valued on a SOFR curve and their prices added.

The text raises these questions but provides no answers, valuation method, or market evidence. It therefore serves as a prompt for exploring package execution, curve construction, and joint risk rather than as guidance on how to price a trade. It also does not establish that “compression trades” formally means any package of swaps or futures, or that DV01 neutrality is required; those points remain unresolved.

Key ideas

  • A package trade groups multiple instruments for simultaneous execution.
  • The example targets exposure around a specific FOMC date.
  • The document asks whether packages require DV01 neutrality or other formal constraints.
  • It raises the question of whether package value equals the sum of standalone instrument values.
  • The document poses these issues without providing answers or pricing evidence.

Tags

Fixed incomeDerivatives pricingExecution
Full text
# Package of swaps and futures


# Package of swaps and futures












I have a friend who works at a bank in rates. He told me that sometimes hedge funds request "packages" of instruments, such as multiple swaps executed simultaneously.

Apparently, these trades can be difficult to price because the requested package can be "weird"—for example, targeting exposure to a specific FOMC date.

Since I am not very familiar with this, I have a few questions about these compression trades:

- I currently define them as a package of trades, but is there a formal definition for compression trades? Do these packages need to be DV01-neutral or have other specific characteristics?

- Why do hedge funds request such trades?

- What makes pricing these trades difficult? If you have a SOFR curve, can't you just price the individual instruments in the package and sum them up?

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.