In a vanilla interest rate swap, you can have multiple resets in one payment period. How do you calculate the cashflows? According the text I read from ISDA 2000, about floating payment, you should be using "unweighted" or "weighted" average of all the rates. But one of our guy says you should compouding all the rates (without the spread) and get an effective rate for the entire payment period, and then apply the spread to calculate the cashflows for the entire period. But I cannot find any text to support that. And also how do you calculate accrued in this case? Do you use the effective rate?

Hi yl470,You are right, you need to see the details written out. If you are doing for example, a CP swap, there are standard but complex rules that are often applied for the averaging procedure and defining the cash flows. If you have a specific deal, it may differ from the usual rules, so the best idea is to get a copy of the legal document describing the deal, which should have everything spelled out in very plain English so that the back office can understand it. Somebody will have this document (trader, back office, legal, …). Otherwise for a proposed new deal, I suggest that you ask for a copy of the “indication” or “term sheet” from the trader or salesman, which should have a preliminary version of the same information. Otherwise you can waste a lot of time with incomplete or incorrect information. Also, proposed deals can change with negotiations, so it is a good idea to stay on top of things. If this is just an idea for the future, ask to get a copy of the term sheet or doc from a previous similar deal.---------------

There are at least 3 ways to do this. The first (and least common, at least where I live) is the "non-compounded" method, which means that the floating side cash flows are calculated for each subperiod using the relevant floating rates (plus spread if any) and simply added together to get the payment for the whole floating side period. A second method is "compounded without spread" (also uncommon) in which you calculate the subperiod cashflows in the manner just described but compound them out to the end of the floating payment period at the relevant floating index flat even if there is a spread on the floating side. The most commonly observed method is called "compounded with spread" and it is just like the second method but with the compounding performed at the relevant floating index rates plus any spread on the floating side of the swap. If the floating side has no spread then methods 2 and 3 are equivalent. As far as I can tell, the financially "correct" method is the last one. It would be interesting to hear if there are any circumstances where the first two are preferred.What do you mean by accrued interest in a swap? Accrued is generally not relevant because when you close out a swap the liquidation value is just the PV of the future known and forecasted cash flows.

I see. Thanks a lot for the help. Are these three ways specified in the ISDA swap standards?

See Section 6.1 of the 1991 ISDA definitions.