-60-
Forecasted Present Value
Net Cash Floating Net Cash
Payment Fixed Payment Floating Payment Flow Discount Fixed Payment Payment Flow
Dates (from FNBC) (to FNBC) (to FNBC) Factor (from FNBC) (to FNBC) (to FNBC)
6/1/1993 $25,278 $20,222 ($5,056) .9852 $24,903 $19,922 ($4,981)
12/1/1993 25,417 21,664 (3,753) .9643 24,509 20,890 (3,619)
6/1/1994 25,278 25,772 494 .9401 23,762 24,227 465
12/1/1994 25,417 29,549 4,132 .9131 23,207 26,980 3,773
6/1/1995 25,278 32,250 6,972 .8845 22,359 28,526 6,167
12/1/1995 25,417 35,180 9,763 .8545 21,718 30,061 8,343
Total —-- --- --- --- 140,458 150,606 10,148
2. Floating-Rate Note Method
An alternative approach finesses the need to forecast
expected cashflows. It works on the analogy between the swap and
a pair of bonds, one of which has a fixed rate and the other of
which has a floating rate. This method relies on the assumption
of which the floating-rate bond is worth its face value on the
effective date or on any reset date. Since the market value of
the swap is equal to the difference between the value of the
floating leg and the value of the fixed leg, and since the value
of the floating leg is known, the problem is to determine the
value of the fixed leg. This does not require the use of a
forward curve.
The floating-rate note method is useful when (1) the terms
of the swap are plain vanilla and (2) the valuation date is a
reset date. In other cases, a correct implementation of the
floating-rate note method requires additional steps which are
comparable to those employed in the forward rate pricing
approach. The two approaches yield the same result in all
events.
Page: Previous 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 NextLast modified: May 25, 2011