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market information was data on the sets of interest rates
prevailing in the financial markets on the valuation date.
The Devon system calculated a swap’s midmarket value in two
steps. First, the system used the market data to calculate a set
of discount factors and forward rates. Second, the system
ascertained the present value of the net cashflows over the life
of the swap. The forward rates were used to translate the
uncertain future cashflows on the floating side of a swap into
expected future cashflows. The discount factors were used to
reduce the fixed and expected floating cashflows to their present
values. Summing the present values of the various cashflows
produced the swap’s total present value.
During the relevant years, midmarket values could be
calculated under the Devon system with precision and agreement,
and midmarket values were readily agreed upon for those swaps for
which sufficient information was provided. The calculation of
midmarket value was critically dependent on the assumptions made
about future interest rates.
3. Yield Curve
a. Overview
The yield curve defined the yield (interest rate) available
in the market for a given maturity on an instrument that met the
definitions used in the construction of the yield curve. The
yield curve, which was usually a zero-coupon yield curve
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