About Lesson
a. A swap is an agreement through which a series of exchange of periodic payment (both interest and principal) is done with the counterparty.
b. The price of the swap is the fixed interest rates specified in the swap contract.
c. The value of the swap, however, keeps changing during the life of the contract, depending upon how the expected future floating rates changes over time:
i. At the initiation of the contract, the value of the swap equals zero.
ii. An increase in the expected future rates will result in a positive value for the fixed ratepayer.
iii. A decrease in the expected future rate will, however, result in a negative value for the fixed ratepayer.
d. A swap is like a series of off-market forward contracts.