Credit Risks & Swaps

[inchvbeam]

In Book 6 P.279, directly quoting the book:
Let us work through an example illustrating these points. Consider two parties
A and B who are engaged in a swap. At a given payment date, the payment of Party
A to Party B is $100,000 and the payment of Party B to Party A is $35,000. As is customarily
the case, Party A must pay $65,000 to Party B. Once the payment is made,
we shall assume that the market value of the swap is $1,250,000, which is an asset to
A and a liability to B.

May I understand how is a swap (besides the interest payments) an asset or liability to the other?

 

[S2000magician]

I’m assuming that this is a plain vanilla interest rate swap.
If interest rates have fallen, then the swap will have a positive value (i.e., be an asset for) the fixed-rate receiver, floating-rate payer, and a negative value (i.e., be a liability for) the fixed-rate payer, floating-rate receiver.
If interest rates have risen, then the swap will have a positive value (i.e., be an asset for) the fixed-rate payer, floating-rate receiver, and a negative value (i.e., be a liability for) the fixed-rate receiver, floating-rate payer.