# Swap Rate Forward Contract

"Because the forward contract rates are all equal in the FRAs that are equivalent to the swap, these would not be zero value forward contracts at the initiation of swap. Recall that forward contracts are based on a contract rate for which the value of forward contract at initiation is zero " Can somebody please explain me this ?

And how exactly does a Swap Contract differ from Forward Contract ? Thank you.

A swap contract is a series of forward contracts placed back to back.

Does that help explain the above? ?

At time period 0 - Forward 0 has a value of zero.

At time period 1 - Forward 1 has a value of zero - but this contract’s value will not be zero at time period 0.

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The swap initiation is at time 0.

I’m sorry, but I still could not get it. Could you use an example ? Appreciate your efforts.

Example of a forward contract: I’m planning on borrowing money in 2 years, but I want to lock in the rate I borrow it at now. I can get a forward contract to do that (or just use the contract to speculate on where borrowing rates will be in the future)

Example of a swap: I have a car loan that has payments at a fixed rate… however, I speculate that if I had a floating rate attached to LIBOR or something, I may be able to have cheaper payments. I set up a swap with another party… I pay the floating rate to the counterparty… and they pay the fixed rate on the loan. This process happens every month. (people don’t do this with car payments… but it is a relatable example)

that is the difference in simple terms…(I have no idea what they are trying to say in that quote!)

I think the quote is from when you try to create swap with multiple forward contracts. When you do this you assume that the contract rate of all the forward contracts will be same as that of a swap. This leads to the value of forward contracts to not be zero, hence off market forwards. Some will have a positive value, some will have a negative value.

Thanks for replying. The example was pretty easy to grasp. However I still have a problem understanding what the statemenit in quote means.

@Gigaloo. Thanks for replying. Could you give an example as to when the value will be posititve and negative. Sorry for the trouble.

I think the value will be positive when price is greater than what it should have been if initial value was zero. And negative when price is less than what it should have been if initial value was zero.