Interest Rate Swap Valuation and Applications › Key Parameters

Michael BrenndoerferUpdated January 5, 20261 min read
Quantitative FinanceAll chapters
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The key parameters for mark-to-market valuation distinguish between the original contract terms and current market conditions:

  • KoldK_{old}: The original fixed rate on the swap. This rate was set at inception and remains constant throughout the swap's life, regardless of how market rates move.
  • NN: Notional principal amount. The reference amount used to calculate payment sizes, unchanged from inception.
  • Znew(0,t)Z_{new}(0, t): Current market discount factors. These reflect the new interest rate environment and are used to present-value the remaining cash flows.
  • TremainingT_{remaining}: Remaining time to maturity. Only remaining cash flows are valued; past payments have no effect on current mark-to-market value.