I've entered into a swap, in which I will pay fixed and receive floating, in which there is a 20bp spread (10 each way). How should I take this spread into account when repricing the swap? 1) It wouldn't make sense to discount the pay leg at the lower rate, and discount the receive leg at the higher rate- this overstates the cost of the spread2) It wouldnt' make sense to discount both sides at mid - this ignores the cost of the spread.3) Does it make sense to discount the pay leg at the lower rate, and discount the receive leg at mid?Does anyone else have any other suggestions, particularly in reference to the way that you price these things in practice, for accounting purposes?

I don't quite get your question:(1) I　think both the fixed and floating legs are discounted by the same rate when you are pricing a swap.(2) what do you mean by 20 bps spreads( 10 bps each)? If it means that I pay fixed rate less 10 bps and receive floating rate plus 10 bps, then it has the same value as I pay fixed rate less 20 bps.

accounting-wise, and risk-wise, we use mid rate for simplicity.

Thanks. Tanecho, What I meant was that that if you receive fixed, you'll get 10 bp below the quoted mid rate. Alternatively, if you pay fixed, you'll pay 10 bp above the quoted mid rate.Jomni, Thanks - do you have any concerns about this approach. Can you think of a way that you feel is 'better'?

gjlipman: In your opening post, you say you'll be paying 20bps spread (which, unless you've entered into a mammoth swap, is a criminal spread!) on the swap and then in your next post it sounds like if receiving, receive 10bps below mid and if paying, pay 10bps above mid. You're not paying and receiving are you?! Hope not, or the bank's taking 20bps off of you for no risk!Anyway, your second post answered your first - value both from mids and modify your fixed leg rate to factor in the commission. EDIT: didn't mean to sound like I was having a dig! sorry if I did

For starters, I'm not trading. More thinking about what the valuation should be for accounting purposes. The given spread was just for argument's sake.And I wasn't talking about both receiving and paying fixed - these are two alternatives. (I guess if I'm stupid enough to do that, the bank deserves to take 20 bps off me!)

Gjlipman,Swaps market makers do the following: Pricing the swap with mid curve (both leg with mid curve)and then from this value they apply a spread (between bid and ask).Just for information: market spreads can be as narrow as half of a basis point between bid and askfor a 10 years swap.Anyway if you want to "resolve the spread" in stead of impose it, what you should do is:1. Pricing BOTH legs with bid curve = swap price 12. pricing BOTH legs with ask curve = swap price 2The difference between those 2 prices is the spread (but it will be bigger than the market spread).By market spread I mean the spread at which a swap market maker is able to work...

Thanks PascalW - that was exactly what I was after.

Multiply the spread by DV01?

No, you don't have to multiply by DV01.But DV01 tell you if the spread is reasonable.A bank who apply a spread of (1 * DV01) between mid price and bid priceis a bank who have a reasonable market maker (this mean a 2*DV01 spread between Bid and Ask).A spread of 10*DV01 for example would be criminal...This apply only for Plain Vanilla IRS !! (exotics have, of course, a more generous spread),

whr can i get some paper on swap pricing

The book by Miron and Swannell would be a suitable starting point for pricing swaps

Plain vanilla Swap/FRAs is a very basic instrument technically. As long as you have a well defined discount curve, all swap cash flow can be discounted and PV obtained. The only complexity comes in obscure conventions and curve construction methods. I find Miron and Swannell have unnecessarily messy mathematical expressions for something that can be explained very intuitively.