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- 2/8/22
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I would like to calculate returns for a plain-vanilla (fixed-for-floating) interest rate swap. Consider, that I am long in USD 5-year swap rate, i.e. I'm holding a receiver swap for 5-year swap rate with notional of 100 dollars. At initiation, the swap should be valued at 0 dollars, as both the fixed leg and the floating leg of the swap should have the same value.
If I valuate the receiver swap a month later and it would have a value of let's say 2 dollars, then how should I calculate the return? Is it just (2 dollars - 0 dollars) / 100 dollars, i.e. change of price relative to the notional? I can't quite figure out how I could calculate the return by comparing change of price to previous price, as it can be at initiation 0 dollars.
If I valuate the receiver swap a month later and it would have a value of let's say 2 dollars, then how should I calculate the return? Is it just (2 dollars - 0 dollars) / 100 dollars, i.e. change of price relative to the notional? I can't quite figure out how I could calculate the return by comparing change of price to previous price, as it can be at initiation 0 dollars.