Hey, I'm new to this site, and this is my first post. I work as a financial analyst for for a financial information company in New Jersey. I'm 22 years old. Okay, My department got some pricing on forward starting swaps for a fixed rate loan we're going to be doing sometime next year, either 3 or 6 months out. My boss got pricing information for a bunch of hedge products from our bankers. He wanted me to evaluate the pricing and I'm not sure how. Can I use a black scholes model for interest rates? If there's a 5 year 3 month forward option on a swap what is the appropriate time variable? 5.25, .25, 5? :confused

is this a plain forward starting swap or a swaption ?either case its a non-trivial project unless you have some tools. Its relatively easy to evaluate the Net Present Value (NPV) of a forward starting swap if you have a yield curve to discount cash flows. It is less easy to evaluate a swaption but their are broker quotes available for a Black Forward (Black-Scholes variant) implied volatilities that you can plug into a model to calculate a "fair" value.

QuoteOriginally posted by: daveangelis this a plain forward starting swap or a swaption ?either case its a non-trivial project unless you have some tools. Its relatively easy to evaluate the Net Present Value (NPV) of a forward starting swap if you have a yield curve to discount cash flows. It is less easy to evaluate a swaption but their are broker quotes available for a Black Forward (Black-Scholes variant) implied volatilities that you can plug into a model to calculate a "fair" value.richpull, what you probably have is some pre-hedging ideas for the loan - i.e. ideas to make sure the fixed rate you end up with stays lowyour loan is 5yrs right? so you care about the 5y swap rate in 3-6months timetherefore, the bank is pitching your boss that he should invest in a 3m5y payer swaption so that if rates go up before he buys the bond, he has the option to pay whatever strike he buys the swaption at instead.so time value is 0.25, forward rate is the 3m5y forward rate, stick that into the black formula