Swap

Exam items lean on the strip-of-forwards view to test direction: in a receive-fixed/pay-floating swap, you gain when rates fall (your fixed receipts now exceed the lower floating payments), so the tell is matching a rate move to which leg benefits. A second favorite asks for value mid-life — since each embedded forward reprices, the swap takes on positive or negative value as the term structure shifts after initiation. Watch the netting rule: only the net interest difference (sized by the notional) changes hands each settlement, not gross flows.

The classic trap is conflating a swap with a single forward — a swap settles periodically over multiple dates, whereas a vanilla forward is one exchange at expiration. Don’t confuse the notional (the multiplier, never exchanged in a vanilla rate swap) with what’s actually paid (the net interest). Note the exception: currency swaps do exchange principal, usually at start and at maturity. Memory hook: a swap is a forward contract that keeps coming back — same engine, repeated dates.