Lesson 4 of 6 · All lessons in this module
  1. Swaps versus a series of forward rate agreements
  2. Pricing a swap: the par swap rateVideo lesson
  3. Why issuers and investors use swaps
  4. Swap price versus swap valueVideo lesson
  5. How swap values change: time, rates and credit exposure
  6. Integrated cases: a treasury desk's futures and swap hedges

Lesson 4 of 6 · 13 min

Swap price versus swap value

A swap's price is its fixed swap rate, set once at inception; its value starts at zero and, on any settlement date, equals the current settlement plus the present value of all remaining expected settlements.

In short

  • Price = the fixed swap rate sNs_N: the no-arbitrage 'forward price', fixed for the swap's life.
  • Value = the swap's mark-to-market (MTM) worth to one side: V0=0V_0 = 0 at inception (ignoring transaction and credit costs), then it moves.
  • Forward analogy: MRR plays the spot price STS_T and sNs_N the forward price F0(T)F_0(T), so each period settles like ST−F0(T)S_T - F_0(T).
  • Periodic settlement value for the fixed payer: (MRR−sN)×Notional×Period(MRR - s_N) \times \text{Notional} \times \text{Period}; the receiver's is the negative.
  • Value on a settlement date = current settlement value + PV of all remaining future settlements (expected at the implied forward rates).

Unlock this lesson free for 7 days

Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.

Start your 7-day free trialLog in