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FRM Part I · FRM Exam Part I · Swaps

Immediately after a reset date, a swap's floating leg is valued at par. Which of the following best explains why the floating-rate leg of a plain vanilla swap is valued at par immediately after a reset date?

The floating leg is at par right after a reset because the next coupon is set at the same rate used to discount it, so the notional plus coupon discounts back to exactly the notional. Future coupons are not known in advance.

  1. AThe floating payments are discounted at the fixed swap rate
  2. BThe next floating coupon and notional discounted at the same rate that sets the coupon equal parCorrect
  3. CThe floating leg has zero duration at all times
  4. DThe floating coupons are known for all future periods

Explanation

Just after a reset, the next coupon is set at the current period rate, so the notional plus that coupon discounted at the same rate equals the notional. Later coupons are not known, and duration is not zero.

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