There is the:
Clean floating spread
This defines for the floating or structured leg the floating rate that must be added to the floating index to close this open position (i.e, this trade) in the market. It is the breakeven spread when the accrued interest is not taken into account.
Dirty floating spread (or breakeven spread)
This defines for the floating or structured leg the floating spread that must be added to the floating index to result in a zero NPV.
For most instruments SD shows the dirty floating spread. However, for the following instruments the clean floating spread is displayed:
A float-float vanilla swap
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The clean floating spread is displayed for this instrument regardless of whether or not the compounding functionality is enabled. |
A float-float general swap
In the Single Option page this amount is shown in the Floating Spread result in the Results area in a bid/ask format in basis points; in the Portfolio page this amount is shown in the Pay Spread field or in the Receive Spread field (in the input area, not in the Results area) in a mid format in basis points.
Why do you need this spread? For instruments in which both sides pay a floating rate, but one side’s rate is modified in some way, such as by a cap, a fixed spread or by being based on a different index, the NPV of the deal will by default be non-zero. In order to counteract this, the system calculates the spread to be paid on the floating rate by the structured leg.
In effect, this positive spread is like paying a periodic premium.
For some instruments you can then edit the system’s calculated bid/ask rates for the floating spread by clicking the Floating Spread button. Of course if you do this, the deal’s NPV will no longer be zero.