Factorization of interest rate swap variation
Methods are described for processing and clearing derivative products such as interest rate swaps (IRSs). A swap value factor (SVF) may be generated to calculate the mark-to-market value of an IRS. The SVF may be a function of interest rates derived from a yield curve. Cash flow may be generated between the buyer and the seller to reflect the change in the market price of the derivative, i.e., the mark-to-market process. The results of a cleared swap may be used to determine or alter the margin deposit required by the buyer or seller.
1. A method of determining a mark-to-market value of an interest rate swap product at time T 2 relative to an earlier time T 1 , the method comprising:
(a) determining, by a processor, a swap value factor for discounting back to time T 2 ;
(b) determining the mark-to-market value of the interest rate swap product at time T 2 relative to time T 1 by subtracting a settlement price at T 1 from a settlement price at T 2 and multiplying this difference by the swap value factor determined in (a); and
(c) outputting the mark-to-market value.
2. The method of claim 1 , wherein the swap value factor encapsulates at least one discounting factor associated with the interest rate swap into a single swap value factor.
3. The method of claim 1 , wherein the swap value factor is a sum of coupon value factors.
4. The method of claim 3 , wherein each coupon value factor is calculated for a coupon expiration date as a product of a daycount fraction and spot discount factor.
5. The method of claim 4 , wherein the daycount fraction is number of days from an international monetary market (IMM) start date of the swap until a first coupon date divided by 360 for the first coupon.
6. The method of claim 4 , wherein the spot discount factor comprises:
sf
n
=
df
n
(
1
+
r
IMM
OIS
×
Stub_days
/
360
)
.
7. The method of claim 4 , wherein the spot discount factor comprises:
sf
n
=
df
n
[
1
+
r
IMM
OIS
×
(
1
/
360
)
]
(
IMM
date
-
Spot
date
)
ACT
/
360
.
8. The method of claim 1 , wherein the net present value at time T 1 is a function of an estimated yield curve.
9. An apparatus configured to determine a mark-to-market value of an interest rate swap product at a time T 2 relative to an earlier time T 1 , the apparatus comprising:
a memory unit; and
a processing unit coupled to the memory unit and configured to cause the apparatus at least to perform:
(a) determining a swap value factor;
(b) determining the mark-to-market value of the interest rate swap product at time T 2 relative to time T 1 by subtracting the settlement price at T 1 from the settlement price at T 2 and multiplying this difference by the swap value factor determined in (a); and
(c) causing display of the mark-to-market value.
10. The apparatus of claim 9 wherein the swap value factor is a sum of coupon value factors.
11. The apparatus of claim 10 , wherein each coupon value factor is calculated for a coupon expiration date as a product of a daycount fraction and spot discount factor.
12. The apparatus of claim 11 , wherein the daycount fraction is the number of days from an international monetary market (IMM) start date of the swap until the first coupon date divided by 360.
13. The apparatus of claim 12 , wherein a next coupon date is the international monetary market (IMM) date.
14. A memory containing computer-executable instructions for causing a computer device to determine a mark-to-market value of an interest rate swap product at a time T 2 relative to an earlier time T 1 by performing the steps comprising:
(a) determining a swap value factor at time T 2 ;
(b) determining the mark-to-market value of the interest rate swap product at time T 2 relative to time T 1 by subtracting the settlement price at T 1 from the settlement price at T 2 and multiplying this difference by the swap value factor determined in (a); and
(c) outputting the mark-to-market value.
15. The memory of claim 14 , wherein the swap value factor comprises a sum of coupon value factors.
16. The memory of claim 15 , wherein each coupon value factor is calculated for a coupon expiration date as a product of a daycount fraction and spot discount factor.
17. The memory of claim 16 , wherein the daycount fraction is a number of days until a next coupon date divided by 360.
18. The memory of claim 17 , wherein the next coupon date is an international monetary market (IMM) date.
19. A method of settling an interest rate swap through a central clearing party computer, the method comprising
(a) determining at the central clearing party computer a swap value factor relative to a later mark time T 2 ;
(b) determining at the central clearing party computer a mark-to-market value of the interest rate swap product at time T 2 relative to time T 1 , wherein determining in step (b) comprises:
(1) subtracting a settlement price at T 1 from a settlement price at T 2 ; and
(2) multiplying the difference by the swap value factor determined in (a); and
(c) outputting the mark-to-market value.
20. The method of claim 19 , wherein the central clearing party computer comprises a clearinghouse.
21. The method of claim 20 , wherein the clearinghouse comprises an exchange.