Can any one explain ,what exactly Swap Spread is?作者: RMontgomery 时间: 2013-4-28 08:53
in a vanilla interest rate swap, you usually will do a fixed leg vs a floating leg (i.e. we agree that you pay me 2% of notional (say $1M) every year, and in exchange I will pay you the floating rate plus a spread (i.e. every year we’ll check what the LIBOR rate is and add that spread, say 2.25% libor rate plus the .84% spread agreed).
The spread is usually set at a level which makes the Net present value of each side of the swap equal to zero (i.e. if you discount all the cash flows on each side back based on the current yield curve). So when you enter the swap with a counterparty, you don’t need to exchange any money to reflect a mark-to-market value of the swap. The MTM of the swap is zero because each side has the same value when the deal is struck.
Hope that helps.
