THE TRADE LIFE CYCLE FOR INTEREST RATE SWAPS
- Recording the trade—contingent
- Account for the upfront fee (premium on the trade)
- Pay or receive the upfront fee for the trade
- Reset the interest rate for the floating leg
- Account for accrued interest on pay leg on valuation date
- Account for accrued interest on receive leg on valuation date
- Reverse the accrued interest on pay leg on coupon date
- Reverse the accrued interest on receive leg on coupon date
- Account for the interest payable on the pay leg on coupon date
- Account for the interest receivable on the receive leg on coupon date
- Pay and receive the interest (net interest if dates coincide)
- Reverse the existing net present value of the trade
- Ascertain the fair value on valuation date
- Termination of the trade and accounting for termination fee
- Payment or receipt of termination fee
- Maturity of the trade
- Reversal of the contingent entry on maturity/termination
- FX revaluation entries (for foreign currency trades)
- FX translation entries (for foreign currency trades)
Let us assume the contract data provided in Table 7.2 for the purpose of understanding the trade life cycle for an interest rate swap:
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