Valuing Interest Rate Swaps: Equivalence of Bond & FRA Methods
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1. Context
In this swatch, we take an example of valuing an Interest Rate Swap, and perform this valuation via two approaches: the Bond Method, where we represent the swap as a portfolio of two bonds – a long (respectively short for the other party in the swap) position in a fixed rate bond that pays the swap rate and a short (respectively long for the other party in the swap) position in floating rate bond. We make ourselves familiar with the steps in each approach and the subtleties involved in both. The details of the reading in which this topic appears are given below:
| Area | Financial Markets and Products |
| Reading | Swaps |
| Reference | John C. Hull, Chapter 7. Swaps In Options, Futures, and Other Derivatives, 10th Edition, (New York: Pearson, 2017). |