![]() ![]() The following R code implements 5-year LIBOR 3M IRS pricing with the curve date of 0 and the spot date of 2. In real pricing, we use linearly interpolated zero curve since payment dates do not coincide with dates of market zero rate curve. Therefore, we can validate our swap pricing model by investigating whether the swap price at the spot date is zero or not. Price of IRS at spot date is zero because there is no profit or loss between two counterparties at inception. When a swap participant receives fixed and pays floating cash flows, his/her swap value at time t is ![]() Swap pricing is to calculate the net present value (NPV), which is the difference between the sum of present values of fixed legs and floating legs. For this unknown future variable rates, we use forward rates for its corresponding interest periods, which are implied in the current market yield curve. Whenever we price a swap, its first variable cash flow is always known but remaining cash flows are unknown. It is worth noting that floating rates are determined at refixing dates before its corresponding interest periods in advance. Market participants expect the forward rate to be the expected future rate in the perspective of fair pricing. I have the following data frame contains cash flows for several items. Since we don’t know exactly the evolution of floating rates in the future, forward rate is used for the alternative variable coupon rate, which is implied in the market forward looking information. Calculate NPV for cashflows at all point in time. Libor Interest Rate Swap Pricing using R codeĪ fixed versus floating interest rate swap exchanges a stream of cash flows determined by 1) a predetermined fixed rate and 2) floating rates which will be determined periodically in the future respectively. We consider 5-Year Libor 3M IRS without OIS discounting as an pre-crisis IRS example. We use swap rates, zero curve data from Bloomberg. This post explains how to price an interest rate swap (IRS) using R code and Excel’s illustrations. ![]()
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