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How To Price A Zero Coupon Swap Using SWPM : 10 March 2010
How To Price A Zero Coupon Swap Using SWPM : 10 March 2010
10 March 2010
Version: 1.00
How to price a Zero coupon swap
using SWPM <GO>
SWPM is the main interest rate derivatives pricing function in the Bloomberg
professional System, allowing users to price a wide range of vanilla and exotic interest
rate swaps, interest rate options, swaptions and interest rate and hybrid structured
notes.
In a plain vanilla swap, counterparties will exchange cash flows during the life of the
swap in the frequency that was pre-established. For zero-coupon swaps the only
change is that there will be only one exchange of cash flow at the maturity date.
Although the payment occurs only at maturity, the rates compound according to the pay
frequency tab.
In this document we will show how to use SWPM to price a Zero Coupon interest rate
swap transaction, how to store it in the system, how to retrieve it and calculate a mark to
market price with current markets or historical curves.
To do this we will use as example a 5 year EUR Zero coupon swap where user receives
a fixed rate of 2.54526% against paying 6M EURIBOR compounded and paid at
maturity.
5 Year 2.54526% vs. EUR 6M EURIBOR Swap
Notional EUR 10 million
Effective Date 03/05/2010
Maturity 03/05/2015
To launch a new Zero coupon Swap transaction, complete the following steps:
A shortcut (or tail) to display this information is: SWPM EUR –ZERO<GO>.
New Screens
The screens have been redesigned for easier navigation. You can click on the tabs at
the bottom of the screen for quick access to the various screens. The Leg Detail tab
now consolidates screens for date generation, amortization and payoffs.
Click on the Configure field in the upper right corner to display the Date
Generation, Amortization or Payoff screens. You can use the payoff
screens to do step up fixed coupons or increasing spreads for floating legs.
The Amortization section allows you to add various amortization balance
payoffs using a loan or security. For more details on amortization, please
see DOCS #2052082 <GO>.
Use of Solvers
Using the Calculate Menu in the lower part of the main screen, you can
select the variable to solve for. The following is a list of variables:
Market Value: The sum of the present values of the leg cash flows.
Accrued: The amount of interest accrued on the leg since the last leg
cash flow date, calculated as leg coupon * day count fraction.
Market Value: Market Value of the Receive Leg - Market Value of the
Pay Leg.
Par coupon: the fixed coupon rate that results in a swap with zero
net market value.
Deal Detail button located on the main screen, first line: Privilege
type, presence of exchange on notional and if timing of eventual
principal exchange, Custom ID number and deal notes.
When saving a deal, a deal number is automatically assigned and the deal
is stored as a <CORP> (F3 key) transaction.
Use the Options/List all deals option and select User or Firm
privileged from the dropdown menu that appears.
Visualize and export in Excel the par or zero coupon curve used for
swap evaluation.
Manually override curve values and apply shifts to the whole curve or
to defined buckets.
Risk: The risk for each leg and the deal is calculated according to the
following equations: Risk = [DV01 / Notional] x 10,000
Key Rate Risk: The change in the market value of the deal for a
basis point change on a particular swap rate. For example, if the par
curve is shifted up or down by one basis point at a particular term
point, and the rest of points on the par curve remains the same, the
dollar change in market value divided by 2 is the key rate risk for that
particular term.
Grid Point Delta: The measure of the price change when a particular
term rate changes. For example, if the spot curve is tent shifted up or
down one basis point at a particular term point, it indicates the shift is
tent-shaped, rising linearly from zero at the previous term point,
peaking at one basis point at a particular term point, and declining
back down to zero at the following term point.
Horizon Screen
Use the Horizon screen to perform what-if analysis using different
scenarios of curves and evaluation dates:
Horizon Settle Date: The date to which future cash flows are
discounted.