IMPORTANT CONCEPTS IN CHAPTER 12
The concept of a swap Different types of swaps, based on underlying
currency, interest rate, or equity Pricing and valuation of swaps Strategies using swaps
For fixed payments, we use the fixed rate on plain vanilla swaps in that currency, R$ or R€.
No pricing is required for the floating side of a currency swap.
See Table 12.6, p. 443.
During the life of the swap, we value it by finding the difference in the present values of the two streams of payments, adjusting for the notional principals, and converting to a common currency. Assume new exchange rate is $0.9790 three months later.
Note how dealers quote as a spread over Treasury rate.
To value a swap during its life, simply find the difference between the present values of the two streams of payments. See Table 12.3, p. 434. Market value reflects the economic value, is necessary for accounting, and gives an indication of the credit risk.