Can anyone provide a quick summary on swaps and swaptions and how to compute them? I’ve read through it twice and thought I understood it until I got to the questions and failed them.
I haven’t written anything about swaptions yet, but here are a couple of articles I wrote on plain vanilla interest rate swaps:
- Pricing: http://financialexamhelp123.com/pricing-plain-vanilla-interest-rate-swaps/
- Valuing: http://financialexamhelp123.com/valuing-plain-vanilla-interest-rate-swaps/
Maybe they’ll help.
Here’re the quick formula for swaptions:
Swaption Payoffs : (market rate – strike rate) x time factor to unannualize x notional $ principle
Swaption valuation : PV ( Swaption Payoff , same payoff for all periods), discount back to PV using different discount factors (for different forward periods)