Decomposing Interest Rate Swap Returns into Carry, Roll, and Price Moves

Summary

The document asks how to compare a forecast of three-month carry and rolldown on a five-year interest rate swap with the swap’s realized return. It cites a decomposition into the return from changes in market value, the effect of the curve point rolling to a shorter maturity, and the difference between fixed and floating leg yields. The cited explanation approximates the combined price and roll contribution using the change in the fixed-leg yield multiplied by the swap’s modified duration.

This gives a conceptual framework for separating expected carry and rolldown from subsequent market-price effects. However, the text is a question rather than a worked calculation: it does not specify conventions, cash-flow treatment, discounting, or how to compute the realized return from market data. The cited approximation should therefore be treated as a starting point, with the precise return measure depending on the swap setup and valuation method.

Key ideas

• Interest rate swap returns can be separated into market price changes, rolldown, and the fixed-versus-floating yield differential.
• The combined price and rolldown component can be approximated using the change in fixed-leg yield and modified duration.
• A carry and rolldown forecast assumes the curve and prices evolve as specified in the forecast scenario.
• The document poses the realized-return calculation but does not provide a full worked method or conventions.

Tags

# How to calculate Interest Rate Swap returns


# How to calculate Interest Rate Swap returns












Could someone help me please?

I have calculated the Carry + Roll Down of holding IRS of several countries. My Carry and Roll Down is about 5y IRS, holding it for 3 months: 5y3M.

So, I have the "expected" return, in case of the curves and prices keep constant over the time (in the next three months).

I'would like to verify if that return in fact become like the expected (calculated by the Carry + Roll Down.

I am using that paper: http://www.sr-sv.com/interest-rate-swaps-returns-empirical-lessons/

Could someone explain me how could I verify that? I mean, how I calculate the "real return"?

Extracted from the site:

"The total return of an IRS consists of three components, namely, return from actual market price changes, return from ‘rolldown’ of the curve, i.e. the shortening of maturity) and return from differential between fixed and floating leg yield. The composite of price and roll returns return is calculated as the change in the fixed-leg yield times the swap’s modified duration."

Thank you!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.