new to the area, and had a question about basis risk.
If I entered into a receive fixed pay 1mo Libor swap, why is it good for me if the 1x3 month Libor widens and bad for me when it tightens. Also if I am OIS discounting, why is it good for me if the OIS/3Mo Libor basis widens and bad for me when it tightens.
Thanks in advance for your help.
I don't agree with either statement. Taking the first statement , if you receive fixed/pay 1m libor , and the 3m/1m basis widens. There are two ways this can happen (I) the forward rates for 1m libor go down and the forward rates for 3m libor stay the same. In this case you make money. But also (II) the forward rates for 3m libor could go up and the forward rates for 1m libor stay the same. In this case you make no money. I am guessing that whomever told you that was assuming that the case (I) applies, since most swaps traders use 3m libor swaps as a benchmark.
In the second statement, if you have just done a swap at market, such that its present value is zero , then changing the discount rate has little effect on its value. The statement would be generally true if the swap were "in the money", meaning having positive value to you. Then if the discount rate is lowered , by libor/iOS spreads widening when 3mo libor stays the same , then you would make money.
