Question

Usually, a fair swap is set up so that the initial net present value is zero.

True

False

Answer 1

True

The fair swap rate is the rate that would equate the present value of the fixed leg of cash-flows to the floating leg of cash-flows when entering into a normal swapwhen a swap is initially set up, the payment structures are set so that the PV of the expected amount a party pays is equal to the expected amount that that party receives. Thus at issuance the swap is a zero NPV contract. Here we exclude the transaction cost otherwise the NPV will be zero for a fair swap.

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