The Swap

The Two Legs

The fixed leg and floating leg are valued from the same curve.

highlighted = computed this step

Fixed leg

At the fixed rate 5%, the fixed payer pays $5.00 each period on notional $100.00.

fixed payment=N⋅K=$5.00\text{fixed payment}=N\cdot K=\$5.00

Floating leg

The floating leg uses the curve's implied forwards. It receives about $4.17, $6.67, and $7.14 across the three periods.

floating paymentt=N⋅ft\text{floating payment}_t=N\cdot f_t
Fixed and floating legsSwap leg cash flows are recomputed from the curve forwards.Fixed and floating legsPeriodDiscount factorForward rateFixed paidFloating received124/251/24 (4.17%)$5.001250/3 cents ($4.17)29/101/15 (6.67%)$5.002000/3 cents ($6.67)321/251/14 (7.14%)$5.005000/7 cents ($7.14)

Forwards are implied

The floating leg uses forwards implied by this curve, not a forecast of realized future rates. This is descriptive, not investment advice.

implied forwards are pricing inputs\text{implied forwards are pricing inputs}