Pricing Swaps and Sensitivities Using Par Yields

Abstract

The following document outlines a technique for pricing interest rate swaps in terms of the underlying asset exposures and the internal yield to maturity of the contract. Hence, you can use the Par Yield as opposed to the entire Zero Curve, since the Par Yield implicitly embeds the Curve at the start of the contract. Likewise, you can use the Duration calculation historically by looking at easily retrievable Par Yields.

Keywords: Swaps, Par Yield, Duration, Convexity, Theta, Risk Back Testing, Rate Formula

JEL Classification: C1, C2, C5