This topic explains iBoxx total return swaps and then describes how to use the associated template in SWPM to price an iBoxx TRS.
An iBoxx standardized total return swap is an agreement between two counterparties to swap the total return of the underlying Markit iBoxx index in exchange for funding based on a floating index (Euribor/Libor) with or without a spread. The asset return payments are made at maturity and the funding flows are paid periodically during the life of the swap. The standard swap maturities are CDS IMM dates (20th of the expiry months of March, June, September and December).
In the total return swap format, the index buyer receives the index performance at maturity and pays Libor plus a spread. The dealer quotes the index initial level (live bid/offer) and the spread on the Libor leg. The final level is the official closing level on the maturity of the swap.
Total return swaps provide market participants with an effective way to get direct and standardized exposure to Markit’s global iBoxx indices. Total return swaps can bridge the gap between the derivatives and cash world, providing unfunded long/short exposures to cash benchmarks with no tracking error and potentially no exit costs.
Market participants that can benefit from this product include asset managers, hedge funds, insurance companies, private banks, distributors, retail and bank credit portfolio managers.
Markit iBoxx indices are market leading fixed income benchmark indices. The following indices are integrated in SWPM's total return swap template:
• ICPRDOV - iBoxx USD Domestic Corporates • IBOXHY - iBoxx USD Liquid High Yield • QW5A - iBoxx EUR Corporates
• IBOXXMJA - iBoxx EUR Liquid High Yield
261 Indicates that projected revenues and expenses are used in the calculation. The projection method includes all future
projected cashflows including the current accrual.
262 Indicates that revenues and expenses are recorded when they are earned or incurred, even though they may not have
• IYDU - iBoxx GBP Corporates
You can use shortcuts (e.g., TRSW <Go> or SWPM -CTRS <Go>) to access the iBoxx TRS template from the command line, or you can click the Products toolbar button to choose a template from a menu.
• For more information about shortcuts, see Shortcuts.
• For information about how to load templates from the toolbar, see Choosing a Template.
SWPM's iBoxx TRS template is organized into tabs that allow you to set up and analyze the swap. You can structure and value your swap on the Main tab of the template, which is divided into four sections. You can input details of the swap in the Leg 1,
Leg 2, and curve data sections, then evaluate the swap in the valuation section.
• Control Area: Allows you to navigate between tabs, analyze deals, set up scenarios, manage risk, generate trade tickets,
and configure your default settings. For more information, see Control Area.
• Asset Leg: Allows you to configure your settings for the asset leg of the deal. You can specify the iBoxx index underlying
the deal and you can enter, for example, the market side, notional units or notional amount, currency, effective date, and maturity for the deal. At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the asset leg appear.
— For information about a field, position your cursor over it or see Definitions. — For more information about iBoxx indices, see IBOX <Go>.
— For information about how to specify the percentage of dividends included in total return calculations, see .Configuring
Leg Details
• Financing Leg: Allows you to configure your settings for the financing leg of the deal. You can enter the market side, the
notional amount (SWPM supports asymmetric notionals), the index used to calculate the floating rate, along with the reset frequency, pay frequency, spread, and other details. At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the financing leg appear.
— For information about a field, position your cursor over it or see Definitions. — For information about scaling reset rates, see Scaling Reset Rates.
— For information about editing leg characteristics such as date generation, amortization, and payoff information, see
Configuring Leg Details.
— For information about overriding the initial and/or historical asset/index values, see Managing Resets.
• Curve Data: Allows you to update the curves that SWPM uses to discount cashflows and project forward pricing when
calculating the Market Value of the swap. SWPM allows you to choose a forward curve for each leg of the deal, so you have flexibility when projecting forward values for the asset and financing legs. SWPM calculates the market value using the selected curve at the market close of the day indicated in the Curve Date field. The Valuation date is the date at which future cashflows are discounted.
Note: By default, SWPM prices swaps as of today, i.e., the default curve date is the current date. To price swaps as of a historical date, you must backdate both the Curve Date and Valuation fields. For example, to mark to market at quarter's end, you can enter the historical quarter-end date in both the Curve Date and Valuation fields. For more information, see
Backdating the Valuation.
— For information about a field, position your cursor over it or see Definitions.
— For information about how to update the curves that appear by default, see Setting a Source Curve.
— For information about how to visualize, customize, and apply shifts to the selected curve, see Analyzing Curves. • Valuation: Allows you to choose the calculation method: projection based263 or accrual based264. Once you select the
calculation method, SWPM calculates the market value of the deal (the sum of the present values of the receive leg minus the sum of the present values of the pay leg) and premium of the deal.
— For information about a field, position your cursor over it or see Definitions. — For information about total return calculations, see Total Return Swap.
You can further analyze iBoxx total return swaps by selecting another tab from the control area. Additionally, you can save your deal by selecting Actions > Save from the toolbar. Once you save the deal, you can access it from other Bloomberg functions or through Bloomberg's API by entering the deal number followed by the <CORP> key. For example, this allows you to download the cashflow schedule for an individual leg to Microsoft® Excel with Bloomberg's API.
• For information about the other tabs that appear on the template, see SWPM Tabs. • For more information about saving deals, see Saving Deals.
• For examples of using the template to price a plain vanilla swap, see Example: Solving for Spread and Example: Solving for
Price.
• For information about Bloomberg's API, see DAPI <Help>.