Tenor Basis Swap Formulae

Abstract

A Tenor Basis Swap, also known as a floating-floating interest rate swap, is a financial instrument whereby floating cashflows from two different interest rates are exchanged, typically floating interest rates determined from benchmark Libor indices of the same currency are exchanged e.g. 3M Libor vs 6M Libor cashflows.

Investors trade Tenor Basis Swaps for several reasons including to hedge or switch floating cashflows to a more preferred fixing frequency, for duration or risk management or to manage liquidity risk . The instrument is of course also used for speculative purposes.

Tenor Basis Swaps are typically quoted in financial markets by the Tenor Basis Spread. In this paper we outline the present value calculation for Tenor Basis Swap pricing and demonstrate how to calculate the Tenor Basis Spread.

Keywords: Tenor Basis Swaps, Basis Spread, Present Value, Pricing, Annuity

JEL Classification: C00, C02, D46, E40, E44, E50, F00, F30, G10, G12