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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

Compared with its value at initiation, the value of an existing plain vanilla interest rate swap to one party is most likely to change over time because:

An existing swap's value most likely changes because market swap rates and the remaining term change. As rates move away from the contractual fixed rate, one party's fixed payments become more or less favorable than a new swap, shifting value between the parties.

  1. Athe notional principal is exchanged at maturity
  2. Bmarket swap rates and the remaining term changeCorrect
  3. Cthe floating rate on the swap is fixed at inception for all periods

Explanation

After initiation, the swap's value changes as the market fixed rate for the remaining term moves away from the contract rate and as the remaining payments shrink. Notional is not exchanged in a plain vanilla swap, and the floating rate resets periodically rather than being fixed for all periods.

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