Pricing and Rate Risk · Swaps Trading Guide

Swap valuation depends on which curve projects cash flows and which curve discounts them. Contract conventions decide how those curves become payments.

Give each curve a job

A projection curve estimates future floating coupons for a particular benchmark. A discount curve converts dated cash flows to present value under the applicable collateral assumptions. These jobs can require different curves. Applying one generic interest rate to every currency, tenor and collateral agreement can create a valuation that looks precise but prices the wrong contract.

Respect the instrument behind an input

Deposits, futures and swaps can help build a curve, but their quote conventions differ. A futures implied rate is not automatically the identical forward rate used in a swap. Timing, compounding and convexity adjustments may matter. Document which instruments, timestamps and transformations enter the curve.

Dates are financial inputs

Business day rules, holiday calendars, payment lags, stubs and accrual conventions affect amounts and discount dates. A known overnight fixing should stay known when a curve is bumped. If two systems disagree, compare the generated schedules and fixing history before blaming the curve engine.

Test the construction

A useful check reprices the instruments used to build the curve within a documented tolerance. Also inspect gaps and sudden jumps between maturities. A smooth line is not proof of correctness, and an apparently irregular line may reflect a real contractual discontinuity. Preserve the input version so the result can be reproduced.

Try it yourself

The same $50,000 payment is valued with discount factors of 0.94 and 0.92. How large is the valuation difference?

Show the worked answer

The values are $47,000 and $46,000. The $1,000 difference comes solely from the discount assumption. It does not establish which curve is appropriate.

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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