Please explain with a numerical example how value of swap becomes positive for fixed payer and negative for fixed receiver when interest rate rises?
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Hello!
A swap is an exchange of series of cash flows.
In the beginning the Fixed rate is fixed in such a way that Value of a swap is always zero at initiation. No party is at profit or at loss.
Suppose Mr A & B has entered into a swap where A will get Libor & will pay a fixed rate 7%. Here the difference is paid on a notional principal (i.e principal amount in not exchanged(exception a currency swap))
So suppose the notional principal amount is $120,000 & 3 months LIBOR rises to 9%. This Libor would be taken 9% p.a compounded every 3 months. So Mr. A gets (9-7)% of 120,000* 3/12.
Hope it helps!
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