swap value with term more than 1 year

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jaychou

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i understand the concept and very confident with calculating the swap value wit term less than 1yr and quarterly or semiannual payment let say:
90, 180, 270, 360 days
i.e. just de-annualize the LIBOR rate when calculating fixed/floating payment : rate * 90/360
however if the term is more than 1yr i.e. given annual payment and the days will be 360 720 the should i follow the same concept when calculating fixed/floating rate payment: rate* 720/360 ?
Please clarify and give me an example if possible. thanks.
 
Yes. r * 720/360 will give you the expected interest, provided r is the annualised rate of interest.
360d - 3%
720d - 4%
2-year fixed rate (annualised) will be:
1- [1/(1+720/360 * 4%)]
divided by
1/(1+3%) + 1/(1+ 720/360 * 4%)
Correct me please if I am wrong. :)
 
I think this is the way it should be:
fixed rate = 1- Z_2 / (Z1+Z2)
Z2 = 1 / ( 1 + rate 720 * 720 /360)
Z1: calculate the same way
You’d get the fixed rate anuallized because its annual payment
 
maxmeomeo, times 2 only instead of number of days,then why divide by 360?
 
Well yes you can time 2, if the question explicitly say they use 360 days.
That is just my habit so I dont mess up with rounding, when you are nervous and they give 365 days or didnt say anything at all, you shouldnot time 2 but *720/365.
Again, that’s my habit :)
 
calvinclk wrote:
maxmeomeo, times 2 only instead of number of days,then why divide by 360?
Click to expand...
Oh realize that I made a typo, yes it should be rate (720) *720/360.
 
LIBOR (and EUROBOR) is kinda special. They are simple interest rates, and based on 360 days. Everything else in the curriculum is compound interest, based on 365 days. The question usually specifies though.
There’s a pretty key formula to find the fixed rate on a swap, given a yield curve. Maxmeomeo got it right. Should look at your notes though, there’s a pretty good explanation of what the formula is and how to use it in Schweser. LOL Schweser should pay me advertising dollars, I boost them up all the time.
 
Normally, FRA and Swap we use 360 days ( its not compounded), but for option, forward and futures, we often use 365 days because of compounding effect. Thát’s my understanding.
 
Agreed with Wayne, i find Schweser explaination of formula way easier to rationalize and understand than the heaps of jargon in the formula in curriculum, esp. FRA.
 
Agree too. Notes are easier for understanding. I have been using notes since Level 1, except to clarify something which I couldnt get from the notes. Also, some of the formulas are not available in the notes.
 
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