HOW TO PRICE A VANILLA SWAP

USING SWPM <GO>

7 October 2010
Version: 1.00
How to Price a Vanilla Swap Using
SWPM <GO>
SWPM is the main interest rate derivatives pricing function in the
Bloomberg professional System, allowing users to price a wide range of
vanilla and exotic interest rate swaps, interest rate options, swaptions and
interest rate and hybrid structured notes.

A plain Vanilla interest rate swap is an agreement between two

counterparties to exchange cash flows (Fixed vs. Float) in the same
currency. The payments are made during the life of the swap in the
frequency that was pre-established.

In this document we will show how to use SWPM to price a Vanilla swap
transaction, how to store it in the system, how to retrieve it and calculate a
mark to market price with current markets or historical curves.

To do this we will use as example a 5 year USD Vanilla swap where user receives a
USD Fixed against paying USD 3M LIBOR.
5 Year USD Fixed vs. USD 3M LIBOR Swap
Notional USD 10 million
Effective Date 03/11/2010
Maturity 03/11/2015

User receives USD 2.6090 Fixed p.a.

Pay / Reset frequency Semi Annual
Day Count 30I / 360
Business days adj. Modified Following

User pays USD 3M LIBOR

Reset frequency Quarterly
Pay frequency Quarterly
Day Count Act/360
Business days adj. Modified Following
To launch a new Vanilla Swap transaction, complete the following steps:

1. Enter SWPM <GO>.

2. Enter the IRS details in the relevant fields on the Main Screen and
press <GO>.
3. Select Calculate Premium from Calculate dropdown menu.
4. Refresh for price (Market Value section).

A shortcut (or tail) to display a swap in a different currency other than your
default in SWPM: SWPM EUR <GO>.

New Screens
The screens have been redesigned for easier navigation. You can click on
the tabs at the bottom of the screen for quick access to the various
screens. The Leg Detail tab now consolidates screens for date generation,
amortization and payoffs.
Click on the Configure field in the upper right corner to display the Date
Generation, Amortization or Payoff screens. You can use the payoff
screens to do step up fixed coupons or increasing spreads for floating legs.
The Amortization section allows you to add various amortization balance
payoffs using a loan or security. For more details on amortization, please
see DOCS #2052082 <GO>.

The Date Configure section regenerates dates based on different first/last

payment dates and roll conventions. Click on Export to Excel to export the
data from these screens to Microsoft® Excel. You can also drag and drop
data from Excel for specific columns in the detail section for custom payoffs
and amortization.

The Leg Detail tab can also be launched when you click on the ‘…’ button
from Leg section in the top half of the screen. To switch between legs, click
on the radio buttons next to Leg1 or Leg2. See sample Float Leg detail
screen. Fees can be entered for either leg at the bottom of the screen as a
onetime event or with a certain frequency.

Current market value is calculated based on the selected curves and

appears in the Market Value section in the bottom of the screen. You can
modify interest rate curve defaults for each currency via SWDF <GO>.

For Mark to Market using historical curves with a backdated evaluation

(mark to market at a specific date in the past), select the desired Curve and
Valuation Date from the Valuation section. The Market Value that appears
is calculated using the selected curve at the market close of the day,
indicated in Curve field. The Valuation Date is the date at which future cash
flows are discounted.
Use of Solvers
Using the Calculate Menu in the lower part of the main screen, you can
select the variable to solve for. The following is a list of variables:

ƒ Fixed Coupon: Calculates a fixed coupon that has to be used to

have a market value divided by the notional equal to premium in the
Premium field.

ƒ Notional: Calculates a notional amount based on your Dv01 input.

ƒ Spread: Calculates the floating leg spread that has to be used in

order to have a market value divided by notional equal to the
premium indicated in the Premium field.

ƒ Premium: Calculates the market value of the swap.

ƒ Par shift function: Par Shift Quick calculator is a scenario analysis

on the relationship between the discount curve and the premium.
The cashflows are presumed unchanged. Only the discount curve is
shifted. As such, the z-spread is the shift on the stripped curve, while
par shift is the shift on the par curve (not stripped).

ƒ You can either enter a spread to calculate the premium or enter a

premium to calculate the spread.

Function Output Description

Output fields in each leg:

ƒ Market Value: The sum of the present values of the leg cash flows.

ƒ Accrued: The amount of interest accrued on the leg since the last leg
cash flow date, calculated as leg coupon * day count fraction.

ƒ Premium = Leg Principal / Leg Notional

Net Valuation Section:

ƒ Principal: market value minus accrued.

ƒ Accrued: the amount of net interest accrued, calculated as the sum

of the accrued interest for both legs. Each leg’s accrued interest is
calculated as the leg coupon *day count fraction.

ƒ Market Value: Market Value of the Receive Leg - Market Value of the
Pay Leg.

ƒ Premium: Principal / Notional

ƒ Unwind PV: sum of present value of existing transaction and of an

hypothetical unwinding transaction where user pay (receives) a
coupon specified in Unwind Coupon field in fixed leg section
(unwinding coupon is considered paid if in the base transaction user
receives a fixed coupon or received if in the base transaction user
pays a fixed rate).

ƒ Par coupon: the fixed coupon rate that results in a swap with zero
net market value.

ƒ Net DV01: Receive Leg DV01 - Pay Leg DVO1

Deal Main Details and Saving Functionality

You can save the deal using the Save Deal button, with the ability to
specify:

ƒ On the main screen, first line: Counterparty name, a ticker and a

series numbers.

ƒ Deal Detail button located on the main screen, first line: Privilege
type, presence of exchange on notional and if timing of eventual
principal exchange, Custom ID number and deal notes.

When saving a deal, a deal number is automatically assigned and the deal
is stored as a <CORP> (F3 key) transaction.
To Evaluate a Saved Deal:
ƒ Use the Options/List all deals option and select User or Firm
privileged from the dropdown menu that appears.

ƒ Type deal number, followed by <CORP>, then type SWPM <GO>.

An Excel file is available to evaluate portfolios of swaps and interest rate

structured notes saved in the system using the SWPM function. To access
the file, type XIRS <GO>.

Curves Screen
In Curves Screen you can:

ƒ Visualize and export in Excel the par or zero coupon curve used for
swap evaluation.

ƒ Manually override curve values and apply shifts to the whole curve or
to defined buckets.

ƒ Choose the interpolation method.

Cash Flow Screen
Use the Cashflow screen to visualize and export deal cash flows to an
Excel spreadsheet. You can choose between Net, Pay or Receive from the
Cashflow field. For existing deals, you click on “show historical cashflows”.
The fixed and float section now displays the number of days in each
coupon period for validating your cash flows with counterparties.
Risk Screen
The Risk screen displays some key risk measures for each leg:

ƒ DV01: The dollar value of a 1-basis-point negative shift in the curve.

ƒ Risk: The risk for each leg and the deal is calculated according to the
following equations: Risk = [DV01 / Notional] x 10,000

ƒ Modified Duration: [DV01 / (Notional + Market Value)] x 10000

ƒ Key Rate Risk: The change in the market value of the deal for a
basis point change on a particular swap rate. For example, if the par
curve is shifted up or down by one basis point at a particular term
point, and the rest of points on the par curve remains the same, the
dollar change in market value divided by 2 is the key rate risk for that
particular term.

ƒ Grid Point Delta: The measure of the price change when a particular
term rate changes. For example, if the spot curve is tent shifted up or
down one basis point at a particular term point, it indicates the shift is
tent-shaped, rising linearly from zero at the previous term point,
peaking at one basis point at a particular term point, and declining
back down to zero at the following term point.
Scenario Screen
• Use the Scenario screen to perform what-if analysis using different
scenarios of curves and evaluation dates: Click on the Scenario tab at
the bottom of the Main screen. The Scenario screen appears.
• Choose from the following options, if applicable:- To display the Market
Scenario Manager function {SHOC<GO>} for a specific scenario, click on
Market Shifts (SHOC) for the applicable scenario. SHOC <HELP>
displays further information. - To display a specific scenario setting, click
on the down arrow to the right of the highlighted Market Shifts (SHOCK)
field and choose a scenario from the dropdown menu that appears.
• To display a specific time shift and/or curve date, click on the down arrow
to the right of the first highlighted Time Shifts (Curve Date) field and
choose a time shift from the dropdown menu that appears. You can also
enter a date in the second highlighted Time Shifts (Curve Date) field.
• Customize your global settings, if applicable:
• To change your path dependent pricing, click on the down arrow to the
right of the highlighted Path Dependent Pricing field and choose from the
dropdown menu that appears. {1 <Go> for further information}
• To change your evolution to the forward, click on the down arrow to the
right of the highlighted Evolution to the Forward? field and choose from
the dropdown menu that appears. {1 <Go> for further information}
•
*Remember*
• You can hide the Global Settings section of the screen if you click on
the Hide Panel On Chart checkbox so that a checkmark appears,
then press <Go>.

• You can also set all of your global settings as default settings if you
click on the Set as Default button at the bottom of the section.
• Enter new values in the applicable highlighted Curve, Shift, or Rate
fields to change the scenarios. You can enter specific values for
each tenor or apply a global shift. To select multiple fields, hold down
the <SHIFT> key. The new present values appear at the bottom of
the screen.
*Remember*

The Scenario tab enables you to interpolate the shifts you want to apply in
the interest rate curve. For example, in one of the Shift columns, add 11
bps for the 1 week tenor, and 40 bps on the 3 month tenor. Clear the cells
in between and press <GO>. The shift values between the 1 week and 3
month tenors are interpolated.

ƒ Scenario Curve Date: Can be historical, today, or in the future. If the

date is historical, then historical data from that date for the curve
selected (which can be a discount, forecast, or basis curve) is applied
in the valuation. If the date is today, then the most recent curve is
used. If the date is in the future, then a snapshot of the most recent
curve is applied for that future valuation date.