Valuation of Interest Rate Swaps

To price a swap, we need to determine the present value of cash flows for each leg of the transaction. In an interest rate swap, the fixed leg is fairly straightforward because the cash flows are specified by the coupon rate set at the time of the agreement. Pricing the floating leg is more complex because, by definition, the cash flows change with future changes in interest rates. The forward rate for each floating payment date is calculated by using the forward curves.

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