IRS swap rate with floating + spread

ThomR

New Member
I want to calculate the swap rate for an IRS where the floating leg is LIBOR+x bp. How can I calculate the swap rate and x that make the swap worth zero at inception?

Thanks in advance!
 

vertigo

Member
you wouldn't calculate x to make the swap have a pv of zero at inception, it would be the fixed rate, i.e., the coupon on the fixed leg, or the forward swap rate. say i receive floating and pay fixed,

floating leg: + LIBOR + x
fixed: -k

then i will calculate k to ensure that the PV

sum_{i} P(0,t_i) (t_i-t_{i-1}) (L(t_{i-1},t_i)+x-k)

is equal to zero

x is usually the spread or the margin added onto LIBOR, it would be specified in the contract a priori to any calculation being completed.

read brigo's book on interest rate models
 
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