Equity Swap - Paying fixed & Receiving Index returns

[Sanjay Sachdev]

In one of the example given in the schweser pg.no.114 derivatives.
In that example swap is valued as the PV of all fixed payments over the life vs. receiving index returns on a quarterly basis. my doubt here is that why not we are adjusting fixed payments on a quaterly basis (rather than considering all the fixed payments) when index is paying us quartetly ? meaning, we are valuing the fixed side as PV of all fixed payments Vs. Quaterly payment on index. shouldn’t the fixed payments considered for only that particular quarter?
we consider an entire year’s interest for the fixed payer to pay but only 30 days equity index return for the payer to receive. is that make sense ? or i am missing something…

 

[phutruongsy]

It can be considered as short a fixed rate bond and long an equity index
Swap value = value of equity index - value of fixed rate bond or liability of equity index payer - liability of fixed rate payer
Liability of fixed rate payer = PV of fixed payments and the principal amount (How you value bond)
Liability of equity index return payer = notional amount x (1 + index return)
In order to calculate the liability of the equity index return payer at a single point of time, you only consider equity return from the last payment date. Which means immediately after the payment is made, index return = 0% and liability of the equity index return payer is the notional amount. This is pretty much like how floating rate bonds revert back to the face value at every payment date.