Previous Topic

Next Topic

Choosing the Appropriate Function

Swap Pricing supports IRS instruments with three levels of complexity. In each case the fair value, cash flow map, or equilibrium par swap rate is generated using two functions, one each for the fixed leg and the floating leg.

 

Note that the fair value for the swap instrument itself is most easily computed as the difference between the value of the fixed and floating leg. Although there is an integrated _Price function for the vanilla IRS instrument (oSWPir1), the input parameters need to be grouped and supplied as arrays in order to meet the Excel limit on parameter numbers, and this can make the use of the function unwieldy. See any of the Swap templates to see how the swap fair value is determined using the _Price functions for the fixed and floating legs.

 

Choosing the appropriate set of functions to deal with any particular interest rate swap instrument depends on the particular features of the swap. Most vanilla swaps can be dealt with appropriately using the oSWPir1 set of functions. Because we value the fixed and floating legs separately, these functions can deal with swaps where:

  • Each leg has different payment frequencies
  • Each leg has different accrual and business day conventions
  • Each leg is valued using a different zero curve and holiday schedule

However, when the swap under consideration has some 'advanced' features, then either the oSWPir2 or oSWPir3 functions may be required. The following table details the features that each set of functions can handle.

Swap Feature

OSWPir1

OSWPir2

OSWPir3

 

.

 

Amortizing / Accreting notional FV

 

No

Yes

Yes

 

Support for stub periods

 

No

Yes

Yes

 

Reset frequency different from coupon frequency (floating leg)

 

No

No

Yes

 

Varying reset margin for projected floating leg payments

 

No

No

Yes

 

Step-up or Step-down coupon rates for fixed leg payments

 

No

No

Yes

 

 

 

 

 

 

Appropriate Template

IRS1 - Vanilla

IRS2 - Custom 1

IRS3 - Custom 2

 

 

 

 

 

 

 

 

Return to www.derivativepricing.com website

Copyright 2013 Hedgebook Ltd.