Swaps. Cash Flows.

CFA Level II
#1

Hi,

This is most likely a simple question, but I dont want to mix up value of swap and cash flows during the swap.

If we have a IR Swap, I have a good understanding of how to calculate the PV of the swap.

However, that is different from the upcoming settlement cash flows right?

Lets say we have PV of floating side 110 and PV of fixed side 100.

Value of Swap to fixed side: 10.

Let’s say there is 30 days till next settlement and 330 days left of the swap.

Which is correct if I am asked for CF at next settlement?

  1. It is simply the difference between Fixed and Floating side? No adjustment for PV Unless they ask for PV of CFs.

  2. It is the value of the swap, and it resets to zero after settlement?

Thanks for the help!

#2

The value of the floating rate bond is 0 on a reset date. But if you were valuing the floating bond on any other date, you will have to calculate the PV of the upcoming coupon payment plus principal.

Whilst the PV fixed rate bond will always be the sum of the present value of cash flows when you value it at any point.

So based on your question, I’d say option 1, but you’d have to account for the PV of cashflows.

#3

CF is exactly what it is, the amount of payments both parties will make and receive.

a swap for 360 days, with quarterly payments. swap rate is 2%, 90-day LIBOR on swap initiation is 1.5%. therefore, on day 90, the fixed payer pays 0.5%(2/4) and the floating payer pays 0.375%(1.5/4)

#4

Thank you sir.

So if they ask for CF I go for option 1 and I do not need to discount for PV of the cash flows?

#5

If they ask for a value, it always given on which date. e.g. 30 days after initiation of the contract. You discount both cashflows using the current (Libor) Spot rates!

So you discount 1 cashflow for the floater, and the other remaining Fixed payments as well. The difference in value is your swap value.

#6

Thank you. I have a good grasp on valuting a swap.

The question was if they ask for Cash Flows at the next settlement.

#7

Correct me if im mistaken, but i think Kaplan stated that CFAI changed the way they’ll ask you to value swaps. You are no longer to required to value swaps in between settlement dates and only ON the settlement days (e.g. if it’s a quarterly swap, at time t=90, 180, 270, 360). Can anyone else confirm? Thanks.

#8

I believe he said it was in the errata on the cfai website for level II. I’d check that out @nycet824

#9

There . . . that’s better.

#10

cash flow as in how much they will exchange.

so no PVing needed.