# Feel so sick with swap valuation

can anyone simplely point me to how to approach questions relating to the swap valuation ? thanks

It all depends on the type of question. Could you elaborate a little bit more? What is it that you hate most about swaps? Which type? (Equity? Currency?)

This may not be helpful, but if I look at formulas for these my head spins. Instead, I think about them conceptually. What do I owe, and what am I due to receive? I suggest reviewing the readings with that in mind. The only formula you really have to know once you have that down is the one for calculating the fixed rate given current spot rates.

Does it help if you think about it as two bonds? One long, the other short. One fixed the other floating. One in FC the other i DC currency.

There are two simple rules to remember:

1. The value of SWAP at initiation is 0

2. There are two sides involved in the SWAP: a fixed payer and a fixed reciever (floating payer).

When valuing the SWAP:

Start with the easer part - floating payer. The value of the swap is reset at each payment date. Thus the value of the floating position is (1+ 1*LIBOR rate at Last Reset Date) discounted at the Current Libor Rate.

Now the fixed position. Simply Discount all future payments, including principal repayment, which is \$1, at the current LIBOR rates.

Take the difference between the PV of both positions. You get the value of the SWAP.

How the fixed rate was calculated? Imagine you have a LIBOR curve. Remember that at initiation both legs have the same value. Now, you must find a fixed rate that would make all future payments on the fixed leg equal to \$1. For this, use the formula Fixed Rate = (\$1 - Last Discount Factor)/ Sum of all discount factors.

If you want to dig further into the topic, think of the fixed leg as a bond with unknown coupon rate, which must be discounted at the given present value factors (Libor curve) to make the value of the bond equal to \$1.