Quoting Interest Rate Swaps by Par Rate or Market Value

Summary

The document describes two ways to quote an existing interest rate swap position. The standard market convention is to quote the fixed rate of a new swap with matching dates and floating leg; this par rate is the rate that makes the swap’s initial market value zero. It therefore provides a comparable quote for the instrument’s terms.

A participant can also request an absolute currency amount for an offsetting swap. That quote need not have zero mark-to-market value and may reflect features of the specific position, including its size, maturity, structure, and collateral agreement. The discussion notes that valuation adjustments such as credit and funding costs may add charges. It offers a concise description of quoting conventions rather than a pricing procedure, and does not provide numerical examples or explain how to calculate those adjustments.

Key ideas

• The standard swap quote is the fixed rate that makes a comparable new swap’s value zero.
• A comparable quote should match the existing swap’s dates and floating leg.
• An offsetting swap can instead be quoted as an absolute currency amount.
• The currency quote may have nonzero mark-to-market value and reflect trade-specific terms.
• Credit and funding valuation adjustments may affect the price.

Tags

# How are Interest Rate Swaps Quoted


# How are Interest Rate Swaps Quoted












Im not sure if this is the right place to ask this question or whether Personal Finance & Money would be a better place. Basically I know that initially interest rate swaps are quoted based on the swap rate which is what the fixed-leg has to pay. However, if one entity holds a position in a swap that they wish to sell how would they quote it to other market participants. Would it be based on the value of that leg of the swap, or would they quote a new swap rate?

## Answer by David Duarte (score 3, accepted)

https://quant.stackexchange.com/a/42275

The price of a swap is the rate on the fixed leg that puts the market value to zero. Swaps are typically quoted this way, so in your example it would be the fixed rate of a swap with the same dates and floating leg as your previous one.

However, if you wish to sell the swap you could also ask for a quote in absolute currency terms (could be negative or positive) of a swap that offsets your current position. In that case the MtM would most likely not be zero and depending on the size, maturity, typology (xccy?) and your particular CSA, this alternative could have additional charges (CVA, FVA, etc) .

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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