Valuing Interest Rate Swaps on Today’s Date Versus the Spot Date
Summary
The document examines whether interest rate swap valuation should include cash flows falling between the valuation date and the spot date. Some vendor approaches treat those payments as historical and effectively report a spot-date value, which can make a spot-starting swap easier to compare with an older trade whose next payment falls on the spot date. The question contrasts that convenience with valuing the contract as of the actual current date.
The answer argues for including those intervening payments in the trade’s value. Swap mark-to-market affects variation margin for cleared and over-the-counter trades, and omitting accrued-period cash flows can distort estimates of counterparty or clearing-house exposure. It can also lead to inaccurate valuations for funds and other end users. The document acknowledges that some vendors may omit the payments for simplicity, but presents that as a trade-off rather than the appropriate basis for actual current-date valuation. It does not detail a specific curve construction or implementation convention.
Key ideas
- Valuing a swap at spot can omit payments due between today and the spot date.
- Including those cash flows supports current mark-to-market and variation margin calculations.
- Omitting intervening payments can misstate counterparty exposures and fund valuations.
- A spot-date convention may simplify comparisons, but the document favors valuation as of today for these purposes.
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Full text
# Interest rate swap valuation date convention # Interest rate swap valuation date convention When we value interest rate derivatives on any date $t$, we can estimate our future payments using some calibrated forward curve $f_s$, where $s$ is the spot date, and discount these back to $t$ using some calibrated discounting curve $d_t$. Some software vendors (such as Bloomberg) consider any payments between $t$ and $s$ as being historical cash flows, which basically means that we value the swap on the spot date, not today. This approach has the benefit that any spot-starting swap can be directly compared to any legacy swap, since only the payments that come after the spot date will be considered (take for instance the case of a spot-starting swap vs a swap traded 1 year ago - the latter will have a payment on the spot date, this yielding present value, dv01 and par rate calculations different among the two swaps if we do not ignore the payment on the spot date). The drawback of this approach is that we naturally are not valuing the swap today which can be a problem for MTM on trading books. Is there any convention for handling such accrued payment issues? Do we ignore all cash flows up until and including the spot date, such that we can directly compare, for instance, par rates of legacy swaps to spot-staring swaps, or is the convention to have a preference for "correct" date valuation? ## Answer by dm63 (score 1, accepted) https://quant.stackexchange.com/a/46890 It’s important to include payments between t and s in the valuation of the trade, for several reasons: 1) the value of the trade drives the variation margin to be applied against the trade, whether it is cleared or otc. If you did not include these cash flows in value, there would be an error in the estimates of credit exposures between counterparties and clearing houses. 2) the value of the trade is used to give accurate mark to market valuations to various types of end users such as hedge funds and mutual funds. Again if these cash flows are not included, the fund valuations will be wrong. It’s true that some vendors not concerned with the above may choose to ignore it for simplification purposes.
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