Consider the following example (pg. 262-3 of the Derivatives book): Party A and Party B are engaged in a swap. At a given payment date, the payment of Party A to Party B is $100,000 and the payment of Party B to Party A is $35,000 so net, Party A pays Party B $65,000. Once the payment is made, we shall assume the mkt value of the swap is $1,250,000, which is an asset to Party A and a liability to Party B. I thought that the party holding the positive value swap effectively owns an asset. In this case isn’t Party B hold the positive value swap (as they receive the positive payment from Party A?). can somone please explain? Intuitively, it makes no sense if you having to pay someone $65,000 net means that you own an asset.
The value of the swap depends on forward rates. The payment on the swap depends on what’s already happened. For example, suppose that you are in an interest rate swap. A pays fixed/B pays LIBOR. The swap is paid in arrears which means that they are settling up on stuff that happened 6 months ago. So suppose that LIBOR was 3.5% 6 months ago and the fixed rate was 10% on a $2M swap. Then A pays B 65K. But in the meantime interest rates have skyrocketed so that 6 month LIBOR = 18%. A is feeling good while he is writing a 65K check to B (don’t spend it all bud, you owe me).