Pricing Interest Rate Swaps – Pricing Basis Swap

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Pricing Basis Swaps or Floating for Floating Swaps

The same methodology will be used to price floating for floating or basis swaps, except that zero curves and forward rates will be derived for both legs of the swap accordingly.

The following basis swap has been priced below:

Term Sheet

BASIS SWAP (FLOATING FOR FLOATING)
Notional 100,000
Floating Rate 1 (Paying Leg) Treasury Rate
Floating Rate 2 (Receiving Leg) Interbank Offer Rate + spread
Spread 0.50%
Payment Annual
Fixed Rate Payment Dates 1st Day of the year starting January 2011 and ending on the Maturity Date
Floating Rate same as Fixed
Valuation Date 27/05/2010
Maturity Date 01/01/2015
Day count convention A/360 for Leg 1 & A/365 for leg 2

Pricing

Treasury Interbank Paying Leg Receiving Leg Payment
Period End ZC FC ZC FC Rate Cash flow Rate Cash flow PV of Paying Leg PV of Receiving Leg
01/01/11 12.21% 12.21% 12.15% 12.15% 12.21% 7,326 12.65% 7,590 6,830 7,085
01/01/12 12.28% 12.33% 12.23% 12.27% 12.33% 12,326 12.77% 12,772 10,214 10,620
01/01/13 12.35% 12.50% 12.35% 12.59% 12.50% 12,505 13.09% 13,086 9,195 9,664
01/01/14 12.41% 12.55% 12.42% 12.59% 12.55% 12,546 13.09% 13,093 8,184 8,588
Total PV 34,424 35,958
Price 1,533.73