fixedforfloating

Fixedforfloating refers to a type of plain-vanilla interest rate swap in which one party pays a fixed interest rate on a notional principal while the other pays a floating rate that resets at regular intervals. The floating leg is typically linked to a reference rate such as SOFR, Euribor, or another benchmark, often with an additional spread. The notional principal is not exchanged at either the inception or the maturity of the contract; only net cash flows are settled at payment dates.

In operation, both legs accrue payments over specified periods, usually quarterly or semiannually. At each payment date, the fixed-rate payer owes a fixed amount calculated from the notional and the agreed fixed rate, while the floating-rate payer owes an amount based on the current reference rate. The party with the higher obligation receives the net difference. The instrument allows parties to tailor exposure to interest rates without altering their underlying debt.

Valuation and pricing hinge on the difference between the fixed rate and the market-expected floating payments. At initiation the swap is typically priced to have zero net value. Over time, shifts in the reference-rate curve alter the mark-to-market value, reflecting changes in expected cash flows.

Uses include hedging floating-rate debt, converting floating liabilities to fixed, or speculating on interest-rate movements. Risks encompass counterparty credit risk, market risk from rate movements, basis risk between reference rates and actual payoffs, and liquidity risk. Related concepts include payer-fixed and receiver-fixed swaps, and other interest-rate derivatives.