HOW TO PRICE A ZERO

COUPON SWAP USING

SWPM <GO>
10 March 2010
Version: 1.00

How to price a Zero coupon 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.
In a plain vanilla swap, counterparties will exchange cash flows during the life of the
swap in the frequency that was pre-established. For zero-coupon swaps the only
change is that there will be only one exchange of cash flow at the maturity date.
Although the payment occurs only at maturity, the rates compound according to the pay
frequency tab.
In this document we will show how to use SWPM to price a Zero Coupon interest rate
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 EUR Zero coupon swap where user receives
a fixed rate of 2.54526% against paying 6M EURIBOR compounded and paid at
maturity.

5 Year 2.54526% vs. EUR 6M EURIBOR Swap

Notional EUR 10 million
Effective Date 03/05/2010
Maturity 03/05/2015
User receives 2.54526% p.a.
Pay frequency Annual
Day Count 30/360
Business days adj. Modified Following
User pays EUR EURIBOR 6M flat
Pay frequency Semi Annual
Day Count Act/360
Business days adj. Modified Following
To launch a new Zero coupon Swap transaction, complete the following steps:
1.
2.
3.
4.

Enter SWPM <GO>.

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

A shortcut (or tail) to display this information is: SWPM EUR ZERO<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.
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:
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.
Notional: Calculates a notional amount based on your Dv01 input.
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.
Premium: Calculates the market value of the swap.
Par shift function: The 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, par shift is the shift on the par curve (not
stripped).
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:
Market Value: The sum of the present values of the leg cash flows.
Accrued: The amount of interest accrued on the leg since the last leg
cash flow date, calculated as leg coupon * day count fraction.
Premium = Leg Principal / Leg Notional

Net Valuation Section:

Principal: market value minus accrued.
Accrued: the amount of net interest accrued, calculated as the sum
of the accrued interest for both legs. Each legs accrued interest is
calculated as the leg coupon *day count fraction.
Market Value: Market Value of the Receive Leg - Market Value of the
Pay Leg.
Premium: Principal / Notional
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).
Par coupon: the fixed coupon rate that results in a swap with zero
net market value.
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:
On the main screen, first line: Counterparty name, a ticker and a
series numbers.
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:
Use the Options/List all deals option and select User or Firm
privileged from the dropdown menu that appears.
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:
Visualize and export in Excel the par or zero coupon curve used for
swap evaluation.
Manually override curve values and apply shifts to the whole curve or
to defined buckets.
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:
DV01: The dollar value of a 1-basis-point negative shift in the curve.
Risk: The risk for each leg and the deal is calculated according to the
following equations: Risk = [DV01 / Notional] x 10,000
Modified Duration [DV01 / (Notional + Market Value)] x 10000
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.
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.

Horizon Screen
Use the Horizon screen to perform what-if analysis using different
scenarios of curves and evaluation dates:
Horizon 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.
Horizon Settle Date: The date to which future cash flows are
discounted.