hard · FRM Part 1 Financial Markets and Products
If a 2-year swap has annual resets and the current 1-year and 2-year zero rates are 3% and 4%, why might the 2-year swap rate be approximately 3.98%?
- The swap rate is simply the average of the 1-year and 2-year zero rates.
- The swap rate includes a premium for the convexity adjustment between forwards and futures.
- The swap rate is a coupon-weighted average of the underlying zero rates for all payment dates.
- Market makers always set the swap rate at a fixed 2-basis-point discount to the zero curve.
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