current value of the swap

CFA Level II Derivatives
#1

If Pvs are:

Ex 1:

1 0.990099

2 0.977876

3 0.965136

Ex 2:

na = 50M

Term 3 year annual

Fixed Rate 3%

Johnson also uses the present value factors in Exhibit 1 to value an interest rate swap that the bank entered into one year ago as the receive-floating party. Selected data for the swap are presented in Exhibit 2. Johnson notes that the current equilibrium two-year fixed swap rate is 1.12%.

the answer is :

The swap has two years remaining until expiration. The sum of the present values for Years 1 and 2 is

n′∑i=1PVt,ti=0.990099+0.977876=1.967975

Given the current equilibrium two-year swap rate of 1.00% and the fixed swap rate at initiation of 3.00%, the swap value per dollar notional is calculated as

V = (0.03 – 0.0112)1.967975 = 0.0369

Why is it multiplying with the PV of Year 1 and Pv of Year 2?

Thanks

#2

Because you’re expecting to get that payoff in one year and again in two years.

#3

Thank you for the reply.

So would it be correct to say that the difference of the rates are discounted by 2 years (year 1 and year 2)to come back to year 0. The question says 1 year ago shouldnt he be discounting year to get to year 1. (adding year 2 and year 3)?

#4

So the bank entered into the swap one year ago. So what? What’s past is past.

Today, the swap has two years left: one payment in one year and another payment in two years. What else matters?