Book 4_Derav_READING 74_PRICING-AND-VALUATION-OF-INTEREST-RATES-AND-OTHER-SWAPS

Question 1

In a simple interest-rate swap

Answer 1

one party pays a floating rate and the other pays a fixed rate on a notional principal amount

Question 2

The par swap rate

Answer 2

is the fixed rate at which the sum of the present values of these FRAs equals zero
MRR1/(1+S1) + …+ MRR4/(1+S4) = F/(1+S1) + …+ F/(1+S4)

Question 3

The price of a swap

Answer 3

is the fixed rate of interest specified in the swap contract.

Question 4

The value of swap

Answer 4

depends on how expected future floating rates change over time.
- An increase in expected future short-term future rates will increase the value of the fixed-rate payer position in a swap,
- A decrease in expected future rates will decrease the value of the fixed-rate payer position

Question 5

The floating-rate receiver

Answer 5

= fixed-rate payer