-44-
different from interpolation. Interpolation is a process by
which the gaps between separated points are estimated and filled
in to produce a complete curve.
The midmarket value of a swap is calculated using a
mathematical model that extracts the market’s forecasts for
future interest rates (implied forward interest rates) from the
current midmarket swap curve to determine the floating-rate
payments that will be due or payable under the swap agreement.21
The implied forward interest rates are used to project the
floating-rate payments into the future. The implied discount
factors are used to discount the fixed-rate payments and the
projected floating-rate payments to their present value.
5. ISDA Form Agreements
The International Swaps and Derivatives Association, Inc.
(ISDA), formerly known as the International Swaps Dealers
Association, Inc., is a trade body that comprises swaps dealers
and other participants in the OTC derivatives market. The ISDA
prescribed customized ISDA form agreements for swap transactions,
and these form agreements were in widespread use during the
relevant years. The ISDA form agreements generally provided a
21 As discussed infra p. 60, the midmarket value of a swap
also can be calculated as the difference between the value of two
specific bonds, both of which have a principal amount equal to
the notional amount of the swap. The first bond is a
floating-rate bond. The second bond is a fixed-rate bond paying
a fixed interest rate equal to the fixed interest rate of the
swap.
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