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Floating Coupons

Posted by Toyin Akin-3 on Mar 28, 2002; 10:06am
URL: http://quantlib.414.s1.nabble.com/Floating-Coupons-tp1948.html

 
Hi all,
 
In my opinion I would use the former.
 
(discount(start)/discount(end)-1.0) * nominal
 
One argument for this is that you can reduce the value of the float side of a swap to just the exchange of notionals. [(dcf(start) - dcf(end5y)) * Notional]
 
Thus if you were to employ Sum(Fra*accurualPeriod*Notional*dcf(end))
 
where Fra = (dcf(start)/dcf(end)-1)/accurualPeriod
 
for every period, the whole thing reduces to [dcf(start) - dcf(end5y)] * Notional
 
If you employ liborFixing * accrualPeriod * nominal, this will not happen.
 
In addition the former formula will contain the least error as you'll find
that if the first Fra period is slightly longer than normal, the period following it will be shorter.
So the errors roughly cancels out.
 
You are right that the liborFixing is what is actually paid, but for calculation purposes
if we are in the middle of a period where a rate has been fixed, then use the actual fixed value
(latter formula), for future cash flows use the former.
 
Enjoy,
Toy.