Reading 72: Pricing and Valuation of Interest Rates and Other Swaps

Book 3: Derivatives

Who gets paid in an interest rate swap?

the party that owes the least

How do you replicate swap contracts?

a series of forward rate agreements with a forward rate that is equal to the swap fixed rate

What is the difference between the replication of a swap contract and swap contracts themselves?

the FRAs are not zero-value forward contracts at the initiation

Par Swap Rate

the swap fixed rate that gives the swap a zero value at initiation

How do you replicate the fixed-rate payer position?

borrow at the fixed-rate

lend at the variable rate

Price of a Swap

rixed rate of interest specified in the swap contract

Value of a Swap

depends on how expected future floating rates change over time

What is the value of a swap at initiation?

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