Swap

Swap is the contract that 2 parties agree to exchange cash flows over a specified time (so a series) based on whether a market variable is above or below a fixed value.

Interest rate swap: The fixed value is the swap rate

Commodity swap: The fixed value is the swap price

Swap rate/price = sum(Forward Discount Rate _t * Forward rate/price_t)/ sum(Forward Discount Rate_t)

The forward discount rate can be replaced by zero coupon too!

Each swap settlement date is just like a forward settlement.

Prepaid Swap – pay the PV of the commodity at inception (large credit risk)

Swap Risks: credit risk, interest rate risk, market risk (market and forward price)