Swap Curve Inputs and Dealer Hedging Instruments

Summary

The document addresses two practical questions in interest rate swap work: which quote side to use when building a curve from short-end reference rates, futures for the medium term, and swap rates for the long end; and how dealers hedge swap exposure. The answer recommends mid-market quotes for curve construction. It identifies interest rate futures, government bonds, and repo financing as the hedging instruments dealers use, and rejects floating-rate bonds as a usual hedge.

The response is brief and offers no derivation, market examples, or comparison of hedge effectiveness. It does not explain how instrument choice varies with a swap’s maturity, risk profile, or market conditions, and it gives no conventions for curve construction beyond the quote-side recommendation. Treat the statements as concise practitioner guidance rather than a full account of curve calibration or dealer hedging practice.

Key ideas

• The answer recommends mid-market quotes as inputs when constructing a swap curve.
• It identifies interest rate futures as one instrument used to hedge swaps.
• Government bonds and repo financing are also named as dealer hedging tools.
• The answer says floating-rate bonds are not generally used for this purpose, without providing supporting detail.

Tags

# Build a swap curve / Swap Hedging


# Build a swap curve / Swap Hedging












I’m going through the exercise of building a swap curve.

I understand I need libor rates for the short-end, futures for the medium-end, and swap rates for the long-end. Should I be using bid, mid, or ask prices for these inputs?

Another somewhat related question: how do swap dealers hedge swaps? I can see a combination of a floating-rate bond and a fixed-rate bond working as a hedge, but also a portfolio of Eurodollar futures. Which is preferred?

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/37918

Always use mid market to build a curve. The hedging instruments used by swap dealers are interest rate futures, government bonds and repo markets (to finance the bonds). No one uses floating rate bonds.

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.