Forward contracts package

Consequently, interest rate swaps can be viewed as a package of more basic interest rate derivative instruments—forwards. The pricing of an interest rate swap will then depend on the price of a package of forward contracts with the same settlement dates in which the underlying for the forward contract is the same reference rate. 

As we have seen, interest rate swaps are valued using no-arbitrage relationships relative to instruments (funding or investment vehicles) that produce the same cash flows under the same circumstances. Earlier we provided two interpretations of a swap (1) a package of futures/forward contracts and (2) a package of cash market instruments. The swap spread is defined as the difference between the swap s fixed rate and the rate on the Euro Benchmark Yield curve whose maturity matches the swap s tenor. 

There are two ways that a swap position can be interpreted (1) a package of forward/futures contracts and (2) a package of cash flows from buying and selling cash market instruments. 

As explained earlier in this chapter, a swap position can be interpreted as a package of forward/futures contracts or a package of cash flows from buying and selling cash market instruments. It is the former interpretation that will be used as the basis for valuing a swap. In the case of a EURIBOR-based swap, the appropriate futures contract is the 3-month EURIBOR futures contract. For this reason, we will briefly describe this important contract. 

A CDRL is a DD Form 1423 list of contract data requirements that are authorized for a specific acquisition and made a part of the contract. All data delivered under contract must be specified by CDRL. The managing authority prepares the CDRL to require that the data package will be prepared and forwarded through the procurement agency, in sufficient copies, at the appropriate date to support program milestones. Many CDRLs refer to an existing Data Item Description (DID) for data format and content. 

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