When a swap is first established at a fair swap rate, its net present value will be zero.

Question

Quizplus · Accepted Answer

When a swap is first established at a fair swap rate, its net present value is calculated to be zero, which means the present value of the fixed rate payments is equal to the present value of the floating rate payments. This assumption is based on the efficient market hypothesis, which states that assets are fairly priced and reflect all available information. However, if the market conditions change, the present value of one leg may become higher than the other, resulting in a positive or negative net present value.

When a Swap Is First Established at a Fair Swap