Swaps pt.

2: Valuation

 On trade date: swap has zero value on trade date since both sides have equivalent value.
 After trade date: value indicate current loss/incentive for one party.
 Post-GFC: swaps between banks are collateralised
i. CME Group (regular clearing house)
ii. Default risk is low
 Value of swap:
- Difference between PV’s of:
i. Floating rate side
ii. Fixed rate side
- 2 methods:
i. Difference between the value of a floating rate and fixed rate coupon bond (Less
used during transition from LIBOR to RFR)
ii. As a portfolio of FWD contract
- Net cash flow discounted at RFR
 Swaps are mostly collateralised and close to risk free.
 RFR:
- Continuously compounded
- Annually/semi-annually
 New swaps (after transition)
 Fixed rate leg is valued by discounting
 Legacy swaps (during transition to new RFR’s):
- Floating rate CFs are discounted at new RFR
- Expected floating rate CFs are projected from Eurodollar future strips

Interest rate swap/Currency rate swap

MMY – Money Market

BEY – Bond Yield

OLD FIXED RATE PAYMENTS = SOFR p.a. (0.0155) * days in reference quarter/360 (91/260) * Initial
amount (10mil)