When pricing interest rate swaps at inception, should the fixed rate or floating rate be priced first?
When pricing interest rate swaps at inception, should the fixed rate or floating rate be priced first?
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user1786107 · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: user1786107
Original post: https://quant.stackexchange.com/questions/53373
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In an interest rate swap, when pricing at inception (e.g. making sure the NPV is zero at inception), is the fixed rate set first and then the floating rate calculated (or vice-versa, e.g. floating rate set first and then the fixed rate calculated)?
I'm assuming it can be calculated both ways, so I could go to a broker and say:
I want to receive fixed 5% on $100 notional, what floating rate do I have to pay Mr Broker.
OR
I want to receive floating Libor 3M payments on $100 notional, what fixed amount do I have to pay Mr Broker.
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siou0107 · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: siou0107
Original post: https://quant.stackexchange.com/a/53376
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Basically, the fixed rate is the rate that SETS the value of the swap to 0. Dealers’ quotes on the swap market are quotes of the fixed rate, so it is your second way.
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Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: user1786107 Source score (net votes, not local likes): 1 Original post: https://quant.stackexchange.com/questions/53373 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In an interest rate swap, when pricing at inception (e.g. making sure the NPV is zero at inception), is the fixed rate set first and then the floating rate calculated (or vice-versa, e.g. floating rate set first and then the fixed rate calculated)? I'm assuming it can be calculated both ways, so I could go to a broker and say: I want to receive fixed 5% on $100 notional, what floating rate do I have to pay Mr Broker. OR I want to receive floating Libor 3M payments on $100 notional, what fixed amount do I have to pay Mr Broker.
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