medium · FRM Part 1 Financial Markets and Products
How is the 'swap rate' typically determined at the inception of an interest-rate swap?
- It is calculated as the simple average of the expected future floating rates over the life of the swap.
- It is set such that the present value of the fixed leg equals the present value of the floating leg, resulting in zero initial value.
- It is set equal to the current overnight reference rate plus a standardized credit spread.
- It is the rate that makes the fixed-rate payer's initial margin requirement zero.
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