Assume a vanilla interest rate swap (notional amount $1) with two months to go before the next payment. Six months later, the sawp will have its final payment. THe swap fixed rate is 7%, and the upcoming floating payment is 6.9%. All payment are based on 30/360. Two months LIBOR is 7.25% and 8 month LIBOR is 7.375%. What’s the credit risk for the party paying fixed? While the concept is clear to me, I don’t understand two things: Why do we have to include the principals in the calculation? and why there is only one payment for the floating leg? Thanks.
go review your level 2 stuff and it should make sense…