标题: Swap Rate formula [打印本页] 作者: pawn 时间: 2011-7-13 14:14 标题: Swap Rate formula
I must be going crazy here... but could someone please advise why Swap Rate = Sum of (FDF) x (forward rate)/ Sum of FDF? Intuitively, I thought current swap rate should just be the NPV of the forward rate; why do we need to divide by the sume of FDF agagin please?
Many thanks!!!作者: IAmNeil 时间: 2011-7-13 14:14
Is that right? I've been going with sum of (FDF/Sum of FDF) * forward rate.
So that's giving you an average of the forward rates, weighted by the FDF.
The reason NPV of forward rates doesn't work is if you're the long, you'll be paying the swap rate in excess of the forward rates early in the term and a swap rate below the forward rates late in the term (assuming an upward-sloping curve). You're essentially lending money early and borrowing money late.
