A swap valuation method which is used to price a vanilla interest rate swap. The value of the fixed leg can be calculated using the following formula:
Where:
N is the notional principal amount
n is the number of payments over the swap term
T is the maturity date of the swap
r is the swap rate (the fixed rate)
ti is the payment date, where i= 1, 2, 3, …., n
B is the money market day count, whilst ti – ti-1 is actual number of days between two respective payment dates
The value of the floating leg can also be calculated using the following equation:
Where:
L is the LIBOR rate for the next payment period.
The swap value is simply the present value of its fixed rate leg minus the present value of its floating rate leg.
