Are they valued just like interest rate swaps? That is, i have interest rate swaps and currency swaps down, do the index swaps and swaptions differ from them? I can probably just do some examples, but I’m using you guys to save time!!
Well at the surface they are all the same…all you are doing is valuing each side of your swap and taking the diff How you do it is slightly diff for each… I assume by index swap you meen equity swap. Equity swap has a “trick” that some people dont get, and thats the fact that you do NOT discount the equity side. It really is not a trick, and there is a reason behind it, if you dont get it use the search, I discussed it in a thread thats less than a month old.
I forget…do index swaps force you to deal with continuously compounding like forwards and futures?
The only difference is that the index swaps (the index payment) is not discounted by the Z value, while the fixed rate payer or floating rate payer are (i believe).
Also remember if you enter index swap like this: receive: S&P 500 return pay: MSCI World Bond Index and returns turn out negative for S&P 500, you have to pay whatever MSCI world bond index returned and the negative return on the S&P 500