Currency swap

CFA Level II Derivatives
#1

Hi to everybody,

I am currently trying to grasp the meaning of the formula for valuing a currency swap. But all I got is an headache.

I understand the functionning and the logic of a currency swap but cannot find the logic behind the formula.

In the first part of the equation we value the payments to be received so we have:

notionnal*(rate for the first currency*sum of all present value factors+last present value factor).

Could someone give me some light in this darkness?

Thanks.

#2

It basically constructs the sum of discounted (to present value) cash flows you will receive or pay (depending on your position) for that leg of the swap.

#3

Ok thanks Nenorr but why adding the last pv factor?

#4

The payments prior to last are “interest payments”, the last PV factor if you note is bigger, it is the “repayment” of the notional principal.

#5

Thank you very much Nenorr. It sounds logic now.