25.4 Compounding swaps Interest is compounded instead of being paid Example: the fixed side is 6% compounded forward at 6. 3% while the floating side is LIBOR plus 20 bps compounded forward at LIBOR plus 10 bps This type of compounding swap can be valued using the assume forward rates are realized"rule. This is because we can enter into a series of forward contracts that have the effect of exchanging cash flows for their values when forward rates are realized Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 25.4 Compounding Swaps • Interest is compounded instead of being paid • Example: the fixed side is 6% compounded forward at 6.3% while the floating side is LIBOR plus 20 bps compounded forward at LIBOR plus 10 bps. • This type of compounding swap can be valued using the “assume forward rates are realized” rule. This is because we can enter into a series of forward contracts that have the effect of exchanging cash flows for their values when forward rates are realized