Transcription of Corporate Finance Professor Gordon Bodnar
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Corporate Finance Professor Gordon Bodnar
SAIS Class Note on Valuing swaps p. 1 Corporate Finance Professor Gordon Bodnar Class Note on Valuing swaps A swap is a financial instrument that exchanges one set of cash flows for another set of cash flows of equal expected value. swaps allow parties to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities, most often to manage risk or to convert cash flows of one type of security into the cash flows of another type without physically have to sell the old one and buy the new one. In all cases, when a swap is initially set up, the payment structures are set so that the PV of the expected amount a party pays is equal to the expected amount that that party receives. Thus at issuance the swap is a zero NPV contract (ignoring transaction costs).
in an interest rate swap and we assume that the interest payments on the original swap at time 0.5 have just been made, there are no net cash flows at the current moment. These cash flows on the original and new swap are as
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