I have completed Swaps twice and Cant seem to understand it …Any tips… Sux since there is a very high probability it will appear on the exam…
i spent all day on this yesterady so let me try to give it a stab. i still cant get currency swaps down, so i may try it one more time closer to exam time but for now i just dont have the time. draw a time line first. make a horizontal line with points for days 90, 180, 270, 360 and then throw in another point if they ask u to value at an “off date” such as day 30. label everything, for both fixed and floating. assuming its a plain vanilla swap paid seminannually, you will have a coupon/2 at day 180 and a coupon/2 PLUS the principal (i.e. notional) at day 360. then discount both cash flows back to the day you are valuing at (so, day 30, in this example). you do this by adding them. if it’s paid quarterly, you would find cash flows at day 90, 180, 270, and 360 (with 360 being principal plus interest). then value floating. floating resets to par at each date, so this is even easier. just find the coupon payment at the next payment date, add the principal, discount to day 30, and youre done. then net the two, and theres your value (neg or pos depends on which side theyre asking for). be careful with what rates you are using to discount. make sure to always match the appropraite libor rate based on the # of days to discount (i.e. if youre going from day 90 to day 30, use 60 day libor, if youre going from day 360 to day 30, use 330 day libor). they may just give you the 60 day or 330 day discount factor, which is the same idea, and a little easier. equity swap is the same thing, except instead of one of the payments you just find the % change in equity index and multiply by notional. no need to discount because you have found the % change in equity index at today’s date. like i said before, i still cant value currency swaps.
search for Jscott24 explanation on fra’s and swaps (including currency) , he was last yrs stud in this topic.
Thanks, The show NY I remember last year about that thread, actually helped a lot on understanding