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We have assumed that the payment dates for the fixed and floating legs of a swap are the same. However, in practice, the payment frequencies
We have assumed that the payment dates for the fixed and floating legs of a swap are the same. However, in practice, the payment frequencies may differ. For example, in the US swap market, the fixed leg usually has semi-annual payments (alpha = 0.5) and the floating leg has quarterly payments (alpha = 0.25). Draw a diagram similar to Figure 4.1 on page 34 of Blyth (or Figure 6.1 in Section 6.1 of the Lecture Notes) for a swap where the fixed payments are semi-annual and floating payments are quarterly. Consider a swap from T_0 to T_n with fixed rate K. Suppose the term length for the floating leg is alpha(FL) and the term length for the fixed leg is alpha(FXD). Write down a formula for the value of the swap V_K^SW(t) (where t lessthanorequalto T_0) in terms of ZCB prices. This continues (b). Does the value of the swap depend on alpha (FL)? Does it depend on alpha (FXD)? This continues (b). As usual, the swap rate y_t[T_0, T_n] is the special fixed rate such that V_yt[T_0, t_n]^SW (t) = 0. Is the swap rate larger if the fixed leg payments are quarterly or if they are annually? We have assumed that the payment dates for the fixed and floating legs of a swap are the same. However, in practice, the payment frequencies may differ. For example, in the US swap market, the fixed leg usually has semi-annual payments (alpha = 0.5) and the floating leg has quarterly payments (alpha = 0.25). Draw a diagram similar to Figure 4.1 on page 34 of Blyth (or Figure 6.1 in Section 6.1 of the Lecture Notes) for a swap where the fixed payments are semi-annual and floating payments are quarterly. Consider a swap from T_0 to T_n with fixed rate K. Suppose the term length for the floating leg is alpha(FL) and the term length for the fixed leg is alpha(FXD). Write down a formula for the value of the swap V_K^SW(t) (where t lessthanorequalto T_0) in terms of ZCB prices. This continues (b). Does the value of the swap depend on alpha (FL)? Does it depend on alpha (FXD)? This continues (b). As usual, the swap rate y_t[T_0, T_n] is the special fixed rate such that V_yt[T_0, t_n]^SW (t) = 0. Is the swap rate larger if the fixed leg payments are quarterly or if they are annually
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