Swap Calculator Essay

900 Words Dec 30th, 2015 4 Pages
Contents: Interest rate swap basics 2
Excel work 4
References 8

Interest rate swap basics
Swaps, being highly liquid derivatives, are not traded on stock exchange, but facilitated by over-the-counter (OTC) trading. Interest rate swap is an arrangement between two parties whereby they exchange one set of interest payment for another. The most widespread arrangement is when fixed-rate interest payments are exchange for floating-rate interest payment on some notional amount over the time. This notional amount is generally not exchanged between counterparties, but is used only for calculation of the size of cash flows to be exchanged, and what is more, usually only resulting cash flow (difference between fixed and floating
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• Column (3): The floating cash flow is found by multiplying the floating rate and the notional amount, adjusted for the payment frequency. That is:
• Column (4): Fixed cash flow is found by multiplying the fixed rate by the notional amount adjusted for the payment frequency:.
• Column (5) represents the discount factor that is found as follows:
• Column (6): PV of floating CF is found by discounting of the floating cash flow: Column(3)*Column(5)
• Column (7): PV of fixed CF is found as follows: Column(4)*Column(5) Let us consider a numeric example to give an illustration of how swap calculator works.
Citigroup has negotiated a vanilla interest rate swap with Google Inc. on which Citigroup will exchange fixed payments of 1.5% for floating payments, paid by Google, equals to 1-year forward LIBOR at the end of each year for the next 5 years on the notional amount of 1,000,000 dollars. After we have input the required parameters and pressed the button “Calculate”, we got our result: swap present value equals 25,653.67, which means that Citigroup has earned 25,653.67 dollars on this swap, and the amount of floating payments exceeds fixed payments.
The detailed information is presented in the table below. We can also build a graph to provide visual prove of prevailing floating payments over fixed ones.

References 1. “Understanding interest rate swap math & pricing”. California Debt and

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