-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.Page: Previous 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 Next
Last modified: May 25, 2011