Lesson 6 of 6 · All lessons in this module
  1. Swaps versus a series of forward rate agreements
  2. Pricing a swap: the par swap rateVideo lesson
  3. Why issuers and investors use swaps
  4. Swap price versus swap valueVideo lesson
  5. How swap values change: time, rates and credit exposure
  6. Integrated cases: a treasury desk's futures and swap hedges

Lesson 6 of 6 · 15 min

Integrated cases: a treasury desk's futures and swap hedges

A treasury case chains a pricing step to a risk step: price the futures contract with its storage cost and locate the margin call, then choose and size a forward-starting swap, then say what can and cannot be known about a swap's value.

In short

  • Futures: price with costs first, F=[S0+PV(C)](1+r)TF = [S_0 + PV(C)](1+r)^T, and measure the margin trail from that futures price, not from spot.
  • Margin call price for a long = f₀ − (initial − maintenance) ÷ size. The call asks you to restore initial margin, not just maintenance.
  • A forward-starting swap fixes today the rate on a swap that begins later. Receiving fixed offsets a fall in the yield at which cash will be reinvested.
  • At the start date a receive-fixed swap is worth (contract rate − new rate) × annuity × notional, which mirrors the income lost on the lower-yielding bonds.
  • After a first net settlement, a swap's MTM cannot be signed without the current forward curve; with an unchanged curve the payer is ahead by about what it just paid.

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