Hi Can any one explain the features of a comounding and Averaging Swap

You will have a better chance of getting an answer if you be a little bit clearer about what you are asking. Are you referring to the treatment of cash flow computation on the floating side of a swap? With respect to compounding, for example, are you wondering about what to do when the rate reset period is more frequent than the payment period? Or are you referring to a marketing names of specific products offered by specific dealers?

Hi krisman1428,I assume by compounding swaps you refer to the case in which the reset frequency is higher than the payment frequency. Then your payment is given through (1 + r1) * tau1 * (1 + r2) * tau2. If you have a spread in the swap this might be added inside the brackets for compounding purposes (sometimes referred to as straight compounding) or not (flat compounding).As far as I know averaging swaps refer to overnight index swaps where an average of the various OIS rates in the interest period is computed, either weighted by the time each single OIS rate is applicable or unweighted (i.e. arithmetic average).Hope this helps...

An interesting question relates to con exits adjustments; that is , do we apply them to the forwards in an averaging swap and not in a compounding swap ?

I believe you got it the other way round.It is compounding which requires convexity adjustment, and average which need not.Compounding removes the early payment advantage afforded to an identical non-compounded swap, where he can re-invest the proceeds when rates are high, and borrow his liability when rates are low.Hence the party receiving the compounded flow should be compensated via a convexity adjustment upfront, provided there is no compounding on compounded interest.

QuoteAs far as I know averaging swaps refer to overnight index swaps where an average of the various OIS rates in the interest period is computed, either weighted by the time each single OIS rate is applicable or unweighted (i.e. arithmetic average).Hope this helps...And the average of the various OIS rates in the interest period is applied to the same period cashflow, or to the next period cashflow? Is there a nice (and simple) reference about averaging swaps?Thanks

So in my understanding Flat compounding assumes that only the notional is multiplied with the floating rate plus spread, while the accrued interest is multiplied only with the floating rate.Straight compounding, on the other hand, implies that both the notional and the accrued interest are multiplied with the floating rate plus spread.

So in my understanding Flat compounding assumes that only the notional is multiplied with the floating rate plus spread, while the accrued interest is multiplied only with the floating rate.Straight compounding, on the other hand, implies that both the notional and the accrued interest are multiplied with the floating rate plus spread.