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Yield Curve


New Member
Hello all,

I'm having difficulty finding an answer to the following questions about yield curves:

1. Does a steep yield curve offer arbitrage opportunities?
2. Does a parallel yield curve shift before t=1 change the value of a swap agreement.

Thanks for any help!!


Active Member
A steep yield curve just means that there is a large difference between short and long term yields. This doesn't lead to an arbitrage opportunity. An arbitrage opportunity would exist if interest rate parity were broken.

For the second question, an interest rate swap will definitely change in value if the floating leg were to shift (parallel or otherwise). Rather than me explaining why, here is a great tutorial from David himself: