A New Model Of Swap Pricing

Interest rate swap is one of the most important tools in the capital market. Ithas the functions of price discovery, risk avoidance and asset allocation. The core ofinterest rate swap lies in how much the fixed interest payer should pay to the counter-party of the interest rate swap. It is a problem of interest rate swap pricing, while itreflects the market expectations of future interest rates.In this paper, we introduced the jump-diffusion model based on Shikai Liu(2008),and worked out the price of default-free interest rate swap, and calculated the value ofthe interest rate swap at any time. Then we defined the time when default occurredand found its distribution according to Shikai Liu(2008). After that, we assumed thechange of cash flow when default happened, and derived the price of interest rate swapwith default risk, and calculated its price at any time. We simulated all the results andmade practical analysis for the price of the interest rate swap.