Swap Foundations · Swaps Trading Guide

A term sheet turns a broad market idea into specific obligations. Small differences in dates, benchmarks and conventions can change both value and cash needs.

Identify both legs

Record the legal counterparties, currency, notional, effective date, maturity and payment direction. For each leg identify the fixed rate or floating index, any spread, reset frequency and payment frequency. An amortising notional schedule changes exposure through time. The word swap alone supplies none of these details.

Separate the relevant dates

Trade date, accrual start, observation date, reset date and payment date need not coincide. Business day adjustments can move a payment while leaving its accrual calculation unchanged under certain conventions. A stub period at the start or end may be shorter or longer than a standard period. Build the calendar before calculating interest.

Test the day count

With a $2 million notional, a 4% annual rate and 92 actual days, an actual/360 calculation gives $20,444.44. Using actual/365 instead gives approximately $20,164.38. The difference is contractual, not a data error. Never replace the specified fraction with a casual assumption that every quarter is exactly one fourth of a year.

Read the exit and disruption rules

Check benchmark fallback language, payment netting, collateral terms, termination rights and calculation agent provisions. A confirmation and the broader legal agreement work together. Save the version used in the valuation and resolve ambiguous terms before execution. A spreadsheet that omits a contractual option or unusual schedule can appear precise while valuing the wrong instrument.

Try it yourself

Calculate a fixed payment on $3 million at 3.6% for 90 days under actual/360, ignoring adjustments.

Show the worked answer

The fraction is 90 divided by 360, or 0.25. The payment is $3,000,000 × 3.6% × 0.25 = $27,000.

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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