Hello,
Concerning the description of a swap as the difference of two bonds as explained in the book "Options, Futures and other derivatives" of Hull : A swap paying floating and receving fixed can be described as the difference of two bonds, one paying floating and one receving fixed : V = Bfl - Bfix
I cannot figure out why the following paragraph is true :
"Banks and others financial institutions usually discount cash flow in the OTC market at the LIBOR rate of interest. The floating rate bond underlying the swaps pays LIBOR. As a result, the value of this bond Bfl equals the swap principal"
The discounting rate used is the LIBOR, but the rate used to estimate the variable payments of the swap is the LIBOR forward rate for me...
Can somebody explains me this ?
Thanks in advance,
Laly.