In a previous post, we presented an example of Interest Rate Swap Pricing in Excel. In this post, we are going to provide an example of interest rate swap pricing in Python. We are going to use the USD Libor swap curve as at December 31 2018. Picture below shows the swap curve. [caption id="attachment_630" align="aligncenter" width="628"] USD Swap Curve as at Dec 31, 2018. Source: Bloomberg[/caption] Recall that an interest rate swap (IRS) is a financial derivative instrument that involves an exchange of a fixed interest rate for a floating interest rate. More specifically,
The valuation of an interest rate swap proceeds as follows, - Construction of the zero-coupon curve
- Determination of the payment schedules
- Calculation of the net present value of future cash flows
The hypothetical interest rate swap is as follows,
Note that we utilize the deposit and swap rates only and ignore the futures prices in the bootstrapping process. The values of the fixed, floating legs and the interest rate swap are calculated using a Python program. We obtain the following result Click on the link below to download the Python program. Originally Published Here: Interest Rate Swap-Derivative Pricing in Python
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