Clean Terms
Key Clean Terms of function Rolldown in IRSrefers to an optional boolean that sets the definition of the rolldown returned by the function Rolldown in either clean or dirty terms, as described below.
Note:
This entry is not relevant if the keyDefinition is set toShorten Spot
If omitted, the default is TRUE, which is how rolldown is commonly understood in most trading applications.
Clean Terms definition:
The constructed shortened swap from the trade dateT₀ to the shortened maturity Tˢʰ - as described in the function Rolldown - is constructed by dragging the forward swap starting at the horizon date Tʰ to the left by the interval Δ
Here Tˢʰ = Tᵐ - Δʰ and Δʰ = Tʰ - T₀
The forward swap - before being dragged to the left - is assumed to have been constructed in clean terms, as described in Clean Terms, which means it starts accruing at or after Tʰ and its initial accrual periods would be broken if Tʰ hapenned to slice an accrual period of the original swap.
It follows that the dragged over spot swap would accrue at or after T₀ and its initial accrual periods could be also broken.
Dragging the forward swap bakwards in time may result in the reset date of the floating leg's first period to be dragged to some date prior to T₀
In such a case, the reset date is moved to T₀ so that the associated fixing can be implied by the given forecasting curve.
This shortened swap definition affects the calculated fair rate rˢʰ and thus the returned rolldown RD
Dirty Terms definition:
The constructed shortened swap from the trade dateT₀ to the shortened maturity Tˢʰ - as described in the function Rolldown - is constructed by dragging the forward swap starting at the horizon date Tʰ to the left by the interval Δ
Here Tˢʰ = Tᵐ - Δʰ and Δʰ = Tʰ - T₀
The forward swap - before being dragged to the left - is assumed to have been constructed in dirty terms, as described in Clean Terms, which means it starts accruing potentially before Tʰ and its initial accrual periods would be always whole regardless of the choice of Tʰ
It follows that the dragged over spot swap could accrue potentially before T₀
Dragging the forward swap bakwards in time may result in the reset date of the floating leg's first period to be dragged to some date prior to T₀
In such a case, the reset date is moved to T₀ so that the associated fixing can be implied by the given forecasting curve.
This shortened swap definition affects the calculated fair rate rˢʰ and thus the returned rolldown RD