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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*…show more content…*

All the requirements imposed for the calculator are met. Before we value the plain vanilla swap, we need to input the following parameters: • Notional • Contract period (Since the majority of interest rate swaps have a contract period between 1 year and 5 years, I decided to specify it within this interval.) • Fixed interest rate • Frequency of payments (1, 2 or 4 times a year) After all the values of the required variables are entered, the button “Calculate” should be clicked to obtain the swap present value and such intermediate values like PV of fixed CF and PV of floating CF, the difference of which is actually the swap present value. The table below represents the logic of the swap calculator. Explanation of columns: • Column (1) represents maturity in parts of the year. The scale interval is set as 0.25, since maximum possible payment frequency (for this calculator) is 4 times per annum. • Column (2): I set forward LIBOR rates as floating interest rates. Depending on payment frequency, 1-year, 6-month or 3-month LIBOR rates are set as

All the requirements imposed for the calculator are met. Before we value the plain vanilla swap, we need to input the following parameters: • Notional • Contract period (Since the majority of interest rate swaps have a contract period between 1 year and 5 years, I decided to specify it within this interval.) • Fixed interest rate • Frequency of payments (1, 2 or 4 times a year) After all the values of the required variables are entered, the button “Calculate” should be clicked to obtain the swap present value and such intermediate values like PV of fixed CF and PV of floating CF, the difference of which is actually the swap present value. The table below represents the logic of the swap calculator. Explanation of columns: • Column (1) represents maturity in parts of the year. The scale interval is set as 0.25, since maximum possible payment frequency (for this calculator) is 4 times per annum. • Column (2): I set forward LIBOR rates as floating interest rates. Depending on payment frequency, 1-year, 6-month or 3-month LIBOR rates are set as

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