I am getting confused with Plain Vanilla Swap, and hope that someone can clear this up for me. I believe there’s no principal exchange in Plain Vanilla Swap at the initiation. Then, when I get to Page 284 of Study Session 17- Reading 65C (schweser book 5), I get confused with the math at the bottom of the page. How come it says “It will also make a final principal payment in 330 days of $1.000” How come the swap suddenly becomes a bond? and have principal exchange? Am I missing something here ? THANKS !!
That is just a way at looking at the swap. You have to value both sides and then net them to determine the payment at each date.
i too am curious as to why it’s that way too… BUT the books make it very clear that that is the case and it makes for very easy questions on the exam… so if we want to debate WHY it’s the case, let’s just wait for the week after the exam.
Also in swaptions I’ve noticed that there is no return of principle at the end, the value is just the PV of the payments… No need to understand at this point, just know how to execute.
With the swaption it just gives you the right to enter into a swap. If that right has value you would also take the other side of the swap at market. This creates an annuity. In this case, there is no need to even talk about principal payments. All will cancel.
I think for swaptions there are three possible settlements: - cash (the value of the swap at the expiration of the swaption); - enter into the designated swap; - ??? - I don’t know anymore the 3rd one - HELP.