We have discussed the valuation of vanilla interest rate swaps in Section 4.4. The net cash flow received by the fixed-rate payer at time \(T_{i}\), \(i=1 \quad m\), is

Transcribed Image Text:

NA [Ln(T-1,T) - Kn], where we assume that A = T-Ti-1 is the time elapsing between two consecutive dates (assumed constant for the sake of simplicity), n = 1/A is the corresponding compounding frequency, N is the notional value, Ln(Ti-1,T) is the LIBOR rate with discrete compounding for the tenor [Li-1, Li], and K, the fixed swap rate. Time To is the last time at which the LIBOR was reset, and we are typically interested in the swap value at time t, To