Lesson 5 of 5 · 13 min
How swap values change: time, rates and credit exposure
After inception a swap's value drifts as settlements are made along a sloped forward curve and jumps when expected forward rates change: higher forwards help the fixed payer, lower forwards help the fixed receiver.
In short
- Fixed payer: MTM gain if PV(floating received) > PV(fixed paid), loss if the reverse. The fixed receiver is the mirror image.
- Passage of time with an upward-sloping forward curve: the fixed payer makes the early net payments, so once they are made the remaining swap has positive value to the payer.
- Rate changes: a rise in expected forward rates raises PV(floating), giving the payer an MTM gain and the receiver an MTM loss; a fall does the opposite.
- A receive-fixed swap behaves like a long fixed-rate par bond (duration added); a pay-fixed swap like a short one.
- An MTM loss for one counterparty is an MTM credit exposure for the other: when rates rise, a dealer facing a fixed receiver has more at risk.
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