hard · FRM Part 1 Financial Markets and Products
A bank is valuing a seasoned pay-fixed swap with 1 year to maturity and semiannual resets. The next reset is in 2 months.
Which of the following is the most accurate method for valuing the floating leg between reset dates?
- Use the currently observed 2-month spot interest rate directly as a proxy for the upcoming floating payment.
- Discount every future expected floating payment individually using today's observed forward interest rate curve, as for a fresh swap.
- Treat the floating leg as always exactly equal to par value simply because it is nominally a floating-rate instrument by design.
- Discount the next floating payment (already known) and the notional principal back to the present from the next reset date
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