Microsoft PowerPoint - PoF.ppt

Pricing swaps with forwardsƒ 260

A swap can be regarded as a convenient way of packaging forward contracts.

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The interest rate swap in our example consisted of 6 forward contracts.

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The currency swap in our example consisted of a cash transaction and 5 forward contracts.

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The

value of the swap is the sum of the values of the

forward contracts implied by the swap

.

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A swap is worth zero to a company initially. However, at a future time its value is either positive or negative.
Derivative securities: Swaps - Pricing swaps with forwards