Detailed Analysis of Off-Market Swap Valuation Using Rate Methods

This report provides a detailed analysis of swap valuation using both the forward rate and principal methods. It begins by calculating the mark-to-market fair value of a long position on an existing off-market 10-year swap, using the forward rate method to determine values based on bid and ask rates. It then applies the principal method to find profit and loss, considering notional principals in US dollars and pounds, and calculating swap payments. The report extends this analysis to determine breakage value, again using both forward rate and principal methods, and detailing the calculations involved in determining profit, loss, and fair value. The analysis includes scenarios, such as profit and loss calculations, and conversion of values to percentages, to demonstrate how a company might receive LIBOR-based payments from a swap bank, impacting their overall costs.

Student Name:
Register Number:
Submission Date:

Table of Contents
Question a.................................................................................................................................................................... 1
Forward rate method.................................................................................................................................................... 1
Principle method.......................................................................................................................................................... 1
Question b.................................................................................................................................................................... 2
Forward rate method.................................................................................................................................................... 2
Backward method......................................................................................................................................................... 2
Reference...................................................................................................................................................................... 3

Question a
i) Forward Rate Method
We can find the values of mark to market fair value of the long position on the existing
off market 10 years swap values. We can find out the current trade dated on 19-December-2017.
The Forward method has been used for the contract of two parties’ contract today for the further
exchange of currencies at forward rate(Certain, 2013).The forward rate can be found by the
value of spot rate, mark market fair value, loss and profit of the years. The business meets with
the supplier, and agrees to pay USD 10,000,000 in 6 months from now.
The date 19-december-2017 is the following of the two table like Bid and Ask. “Bid” is
denoted as buy of the product details in 10 years; “Ask” is denoted as sell the product details of
after 10 years. It can follow the great bending pound and USD values. Initial 10 year rate of bid
value is $3.09 and ask value is $3.12. We have to find the value of spot rate and forward rate.
The dealer of 10 years of Us dollars= 3.09
10 -0.309 . The buyer can be, by the US dollars is 3.12
10
=0.312
The contract of the value is 0.311*10,000,000=3110000
0.312*10,000,000=3120000
Let us consider the loss value is =30,000
Calculating the profit value is,
10,000,000*0.310=31,0000
The forward rate is
= ( 0.309−0.312 X $ 10 millionX 304
3650 ) X( 1
1+ 0.309 X ¿ ¿ )
=$-259857 X0.2653938
=$68964
ii) Principle Method
To find the profit and loss and fair value of profit and long in position (Sood, 2013).
1

The quality spread differential is (six-monthLIBOR+3.09 percent))0.309-
(monthLIBOR+3.12).0.312
To find the notional principals in US and pounds by using the swap of the semi-annual payment.
This can be calculated as $10,000,000/3=$10,000,000, the swap to convert $10,000,000.
The equivalent notional principals are
Us notation principal is= $10,000,000/(3.09/3)=$107874
Pound notation principal value -$10,000,000/(0.312/3)=1.04
The swap payment of the principal is,
Company make swap payment= $10,000,000/(107874/3)=309.002
Receiver swap payment is=$10,000,000/(1.04/3)=320512
For the ten years long swap position of the profit and loss =320202
Convert the value of percentage is 0.23
It will receive six-month LIBOR + .23percent from the swap bank.
This arrangement results in an all-in cost of three-month LIBOR for Company A, which
is .23percent less than the FRNs indexed to three-month LIBOR +.23percent it could issue on its
own. The arrangements with the two counter parties net the swap bank .23percent per annum,
which is received quarterly.
Question b
Forward rate method
To find the breakage value on 19-december-201, the following two table like Bid and Ask,
where bid is denoted as buy the product details in 10 years, Ask is denoted as sell the product
details in after 10 years (Bouzaouache, 2019). It can follow the great banding pound and USD
2

values. Initial 10 year rate of bid value is $1.67 and ask value is $1.75. We have to find the value
of spot rate and forward rate. The dealer of 10 years of Us dollars= 1.67
10 =0.167.
The buyer can be by the US dollars is 1.75
10 =0.175
The contract of the value is 0.167*10,000,000=1670000
0.175*10,000,000=1750000
Let us consider the loss value is =20,000
Calculating the profit value is,
10,000,000*0.166=1660000
The forward rate is
= ( 1.67−1.75 X $ 10 millionX 304
3650 ) X ( 1
1+ 1.75 X ¿ ¿ )
=$-1457532X1.14575
=$16697
Principal method
To find the profit and loss and fair value of profit and long position.
The quality spread differential is (six-monthLIBOR+1.67percent) )0.167.
To find the notional principals in US and pounds for a swap with the semiannual payment can be
calculated as $10,000,000/3=$10,000,000 the swap to convert the $10,000,000, the equivalent
notional principals are
US notation principal is= $10,000,000/(0.167. /3)=$59880.
Pound notation principal value -$10,000,000/(1.72/3)=19379
The swap payment of the principal is
Company make swap payment= $10,000,000/(59880./3)=556.668
Receiver swap payment is=$10,000,000/(19379/3)=1.720074
For the ten years long swap position of the profit and loss =556.668
Convert the value of percentage as 5.5
It will receive six-month LIBOR + 5.5percent from the swap bank. This arrangement results in
an all-in cost of three-month LIBOR for Company A, which is 5.5percent less than the FRNs
3

indexed to three-month LIBOR +5.5percent it could issue on its own. The arrangements with the
two counter parties’ nets the swap bank 5.5percent per annum, received quarterly.
Reference
Bouzaouache, H. (2019). Tensor Product-Based Model Transformation and Optimal
Controller Design for High Order Nonlinear Singularly Perturbed Systems. Asian Journal of
Control.
Certain, P. (2013). A vibrational principle for the complex-coordinate method. Chemical
Physics Letters, 65(1), pp.71-72.
Sood, K. (2013). Linearization of SOA with Feed Forward Technique. Saarbrucken: LAP
LAMBERT Academic Publishing.
4