Interest rate swap valuation
An interest rate swap can be valued by estimating the remaining fixed and floating leg cash flows and calculating their present values consistently with the contract, market curves, reset conventions, collateral and counterparty assumptions. The value to one party is the present value received less the present value paid; the other party's value is opposite before differing valuation adjustments. Floating cash flows beyond known resets are estimates based on relevant forward information, not simply today's rate repeated forever. Market practice can require multiple curves and additional adjustments.
Worked example
A simplified swap has a fixed leg with present value $98,000 and a floating leg with present value $105,000. For the party receiving floating and paying fixed, value is $105,000 − $98,000 = $7,000 before fees and any counterparty or collateral adjustments.
Common mistake
Adding both legs rather than netting the received and paid values, or assuming future floating rates remain equal to today's rate without a stated assumption.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |