From Green Needham
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- Swap value is zero at initiation, so can calculate price
- Replicate swap with underlying assets and price those
Key insights for pricing:
- Value of a floating rate security is par value at the start and at all coupon reset dates
- To the borrower, an interest rate swap is equivalent to borrowing at a fixed rate.
- Therefore, value of fixed payments is equivalent to the price of a coupon bond (see this section of Fixed Income Investments). So the fixed rate is:
- P0 is the present value factor based on the interest rate applicable to that period (0 to tn) which can be:
- a single rate
- a series of chain-linked periodic rates)
- PV factors are as for valuing interest rate swaps
- New term structure for time t is used to calculate PV factors
Testing upload in new version
Testing team pages