Walk me through the full mark-to-market swap valuation process.

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AcadiFi · Accepted Answer

MTM valuation of a swap follows a disciplined sequence: build the curve, project floating cash flows, discount both legs, and net. ```mermaid flowchart TD A[Build OIS
curve] --> B[Project
floating CFs] B --> C[Discount
fixed leg] B --> D[Discount
floating leg] C --> E[Net PV
difference] D --> E E --> F[Post
variation margin] ``` Step 1: Construct the discount curve from OIS (post-2008 standard for collateralized swaps). Step 2: Project forward rates from the projection curve (SOFR forwards for USD). Step 3: Discount each fixed coupon at the appropriate OIS zero rate. Step 4: Discount each projected floating coupon likewise. Example: Morven Asset Management holds a pay-fixed SOFR swap on $75M notional, 4 years remaining, paying 3.20%. Current OIS forwards imply floating payments totaling PV $9.41M; fixed PV is $8.88M. MTM to Morven = Floating PV - Fixed PV = +$0.53M (they receive floating worth more than they pay fixed). Under CSA, this $0.53M is posted as variation margin daily. The counterparty's books mirror this as a -$0.53M exposure. Dual-curve discounting (OIS for DF, SOFR for projection) is now mandatory under FRTB and IFRS 13 fair value hierarchy — Level 2 inputs.

Walk me through the full mark-to-market swap valuation process.

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