I understand how to arrive at the value of the fixed and floating rate swap but I am always confused as to whether I subtract the fixed from the floating or the floating from the fixed. Can anyone help on this?
Depends on what the nature of the swap is.
If it is Pay Fixed Receive Floating for example - do
Fixed + Floating
- = Inflow
just remember that the value of each side is what that side has to PAY. (not receive)
so if the fixed value is higher than floating, the fixed loses and the floating wins (because the fixed side has to pay more than it will receive from the floating side).
if the floating value is higher than the fixed, the floating side loses.
then look at the question and work out what side it’s asking you for.
Thanks kiakaha that is what I was doing but I was spending too much time thinking about it. I also like cpk’s way.
thanks to both of you
just be careful, you can be long the fixed swap or short.