Research Execution and Governance · Swaps Trading Guide

A swap backtest must reconstruct cash flows and financing, not just changes in a headline swap rate. Historical information must be limited to what was known at the time.

Define the trade before testing

Specify entry rules, contract terms, sizing, holding period and exit conditions before inspecting results. Distinguish a constant maturity series from an actual aging contract. A five year swap entered last month is no longer a new five year swap today. Replacing it with a constant maturity quote silently changes the tested strategy.

Combine value and settled cash correctly

Period performance includes the change in remaining value plus settlements and income, minus relevant costs. If a coupon leaves the valuation when paid, add its cash receipt once. Include financing and collateral remuneration under explicit assumptions. Initial margin is a funding requirement rather than automatically a permanent trading loss.

Use available information only

A trade decision made at noon cannot use a fixing or revision published later that day. Preserve original timestamps and handle unavailable quotes without borrowing future observations. Avoid selecting only surviving counterparties or securities when evaluating credit or equity swap histories.

Report costs and uncertainty

Include bid and ask spreads, unwind charges, clearing costs where relevant, and stressed financing. Compare performance across different periods and assumptions. A strategy that works only with perfect midprice execution and unlimited liquidity is not an implementation ready result. Keep an untouched evaluation sample and record every material rule change.

Try it yourself

Remaining value rises by $20,000, settled cash receipts are $5,000 and total period costs are $8,000. What is the simplified economic result?

Show the worked answer

The result is $17,000. This assumes the settled cash is no longer included in the ending valuation and that costs are counted only once.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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