Pricing and Rate Risk · Swaps Trading Guide

A swap that began near zero value can become an asset or a liability. Track the remaining payments, rather than confusing the last settlement with total profit.

The original rate stays in the contract

When a vanilla fixed rate swap is agreed, its fixed coupon usually remains unchanged. Market rates for comparable new trades can move. For a fixed receiver, an old coupon above the new par rate generally adds value, with other terms unchanged. A fixed payer has the opposite exposure. Valuation depends on the remaining schedule, not the original maturity label.

Estimate with the remaining annuity

In a simplified matched framework, fixed receiver value is notional times the difference between the contractual fixed rate and the current par rate times the remaining annuity. A $5,000,000 swap receiving 4% when the comparable par rate is 3%, with annuity 2.7, has an approximate value of $135,000. The payer has the opposite clean value.

Account for payments already made

A coupon paid yesterday is no longer part of future cash flows. Total economic performance includes settled payments, changes in remaining value and relevant costs. Adding yesterday’s coupon to a valuation that still includes it counts the same cash twice. Reconcile valuation dates, settlement dates and whether quoted values include accrued amounts.

An unwind is a separate transaction

Model value is not guaranteed cash proceeds. Termination terms, dealer pricing, accrued amounts and collateral release affect the final settlement. A positive value can coexist with funding demands elsewhere in the portfolio. Keep the valuation report and the cash forecast connected but distinct.

Try it yourself

A fixed payer has $3,000,000 notional, a contractual rate of 3% and comparable par rate of 3.5%. Use an annuity of 1.8 to estimate its value.

Show the worked answer

The payer benefits from paying the lower fixed rate. $3,000,000 times 0.005 times 1.8 is approximately $27,000 before adjustments and execution costs.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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