How do I value an existing swap partway through its life?

Question

AcadiFi · Accepted Answer

Value a seasoned swap by replicating it as the difference between two bonds. A pay-fixed, receive-floating position equals a long floating-rate note minus a short fixed-coupon bond. The fixed-coupon bond carries the original contract rate C_0; both are discounted at today's zero curve.

Sunbeam Fund entered a 5-year pay-fixed swap 18 months ago at C_0 = 3.80% with $50M notional, annual pay. Remaining cash flows are 3.5 years. Today's zero rates produce discount factors 0.9710, 0.9380, 0.9025, and 0.8658 (the last for 3.5 years with accrued interest). Assume we are exactly at a reset date so the floating leg is worth par, $50M.

Fixed leg PV = 3.80% × $50M × (0.9710+0.9380+0.9025) + $50M × 0.8658 = $1.90M × 2.8115 + $43.29M = $5.34M + $43.29M = $48.63M.

Value to pay-fixed side = floating PV - fixed PV = $50M - $48.63M = $1.37M gain. Rates rose since inception, so the pay-fixed party benefits because they locked in a below-market fixed rate.

If the valuation date falls between reset dates, the floating leg is worth the notional plus the next known coupon, all discounted to today. Always track whether you are long or short the fixed leg.

How do I value an existing swap partway through its life?

Master Level II with our CFA Course

Related Questions

Practice Questions