Interest rate swaps

CFA Level II Derivatives
#1
  1. In valuing interest rate swaps post initiation, why do we net fixed rate at t=0, with fixed rate at t=t?

Is it because that becomes the floating rate, (which we will receive as a fix payer, floating receiver)with the newer term structure? (=Current swap fixed rate?)

  1. In interest rate swaps, the quarterly rates are annualized to arrive at annual swap fixed rate, but in currency swaps the given quarterly rates are used to compute value. (In my observation). Is this correct?
#2

1 - Fixed rate at t=0 is the fixed rate that you are primarily concerned with aka the fixed rate you will pay/recieve

Fixed rate at t=t is the fixed rate that is currently applicable assuming you entered into a swap at t.

The LIBOR is going to be the same for t=0 and t=t at t.

The value = the difference between what you are concerned with(fixed rate at t=0) and what could have been (fixed rate at t=t)

2 - to work with swaps or currencies, you would essentially need to unannualize the LIBOR rates.

annualizing is merely a method of presenting the rates in a comparable manner. But when you need to find a fixed rate you would always need to unannualize it for your calculations.

#3

Thanks. I meant it was just assumed to be annual in interest sate swaps and quarterly in currency swaps in the examples I came across. Anyway, it won’t be ambiguous in exam.