Bank One Corporation - Page 202

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                    3.  Midmarket Rate                                                
               The midpoint (average) of the bid and ask rates for a                  
          specified maturity is known as that maturity’s midmarket rate.              
          The theoretical midmarket rate is the fixed interest rate for               
          which the present value of the cashflows from the fixed leg of a            
          swap equals the present value of the projected cashflows from the           
          swap’s floating leg.  In other words, if a swap was entered into            
          at the midmarket rate, then the present value of the fixed-leg              
          payments would equal the present value of the anticipated                   
          floating-leg payments.  When any swap with a midmarket rate is              
          valued also using the same midmarket rate, then the swap has a              
          theoretical net present value of zero to both counterparties.               
               A plain vanilla swap with a fixed rate equal to the current            
          midmarket rate has by definition a market value of zero and is              
          called a “par swap”.  It is also said to be “at-market” as                  
          opposed to “off-market”.  If the fixed interest rate is above the           
          current midmarket rate, the swap is said to be “above-market” and           
          has positive value to the party that sold the swap and is                   
          receiving the fixed payments.  If the fixed interest rate is                
          below the current midmarket rate, the swap is said to be                    
          “below-market” and has negative value to the party that is                  
          receiving the fixed payments.  A swap is a zero-sum contract, so            
          if it has a positive market value to one counterparty, it has a             
          negative market value to the other counterparty.                            






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Last modified: May 25, 2011