Glossary — M07: Pricing and Valuation of Interest Rate Swaps
| Term | Definition |
|---|
| Interest rate swap | An OTC derivative in which two parties exchange fixed-rate and floating-rate interest payments on a notional principal over a specified period |
| Par swap rate | The fixed rate that makes the swap have zero value at inception; derived from the term structure of spot rates |
| Fixed-rate payer | The party that pays the fixed rate and receives the floating rate; benefits when interest rates rise (long the swap) |
| Floating-rate payer | The party that pays the floating rate and receives the fixed rate; benefits when interest rates fall (short the swap) |
| Swap value | The present value of the difference between the remaining fixed and floating payments; zero at inception, changes as rates move |
| Notional principal | The hypothetical amount on which swap payments are calculated; never actually exchanged in a plain vanilla interest rate swap |
| Net settlement | The practice of exchanging only the net difference between fixed and floating payments each period: (MRR−F)×Notional×Period |
| Off-market forward | A component forward within a swap that has a non-zero value because the swap’s fixed rate differs from that period’s individual forward rate |
| Market reference rate (MRR) | The benchmark floating rate used in swap settlements (e.g., SOFR, EURIBOR); set at the beginning of each period, paid at the end |
| Swap as portfolio of forwards | A swap can be decomposed into a series of FRAs (off-market forwards) with the same fixed rate but different forward rates for each period |
See Also