INTEREST RATE DERIVATIVES

CALCULATING EURO SWAPNOTE®

FUTURES PRICES

Fast Facts
What is it? Who is it for? What does it provide?
Euro Swapnote® is an on-exchange futures Euro Swapnote® futures are for anyone who Euro Swapnote® provides an open and
contract referenced to the European wishes to gain or hedge exposure to the efficient means of gaining euro swap
interbank curve. European interest rate swaps curve via a market exposure in a contract that already
centrally cleared contract. meets new regulatory requirements.

Euro Swapnote® futures are priced like a notional bond futures

contract. The notional underlying bond has an annual coupon of
6% falling on each anniversary of the contract’s reference day
(“effective date”), based on a notional underlying of €100,000. Euro
Swapnote® futures are quoted per €100 nominal.

Euro Swapnote® EDSP (The Exchange Delivery Settlement Price)

Euro Swapnote® futures contracts are cash settled on the last trading day against
a single price set by the Exchange (the EDSP). The EDSP is calculated as sum
of the present values on the effective date of all of the cash flows in the notional
underlying bond.

Each cashflow will fall on the anniversary of the notional delivery date, and based
upon a coupon rate of 6% per annum is equivalent to €6 per €100 nominal.
The present value of each cashflow is discounted using a zero coupon curve
derived from euro par swap market rates published by ISDA two days prior to
the effective date.

Coupon payment dates are determined using the Modified Following Business
Day Convention, i.e. if an anniversary date falls on a non-working day, the
coupon payment date is moved to the next working day. Consequently the
coupon payment amount is adjusted using the Relevant Daycount Fraction “Ai” in
accordance with a 30/360 day count basis.

Example: The EDSP for the June 2012 5 Year € Swapnote® futures contract
Effective Date: 20 June 2012
ZERO COUPON
CASHFLOW DISCOUNTED
TERM (YEARS) DAYCOUNT (Ai) ISDAFIX® (Ri) DISCOUNT CASHFLOW
DATE CASHFLOW
FACTOR (Di)
1 20 Jun 13 1.00000000 0.559% 0.99444107 6.00000000 5.96664642
2 20 Jun 14 1.00000000 0.845% 0.98328819 6.00000000 5.89972914
3 22 Jun 15 1.00555556 0.933% 0.97242466 6.03333336 5.866962141
4 20 Jun 16 0.99444444 1.086% 0.95756132 5.96666664 5.713449184
5 20 Jun 17 1.00000000 1.252% 0.93931416 106.00000000 99.56730096
EDSP 123.01
Bootstrapping Technique
To calculate the zero coupon discount factors using the swap market rates, the
following “bootstrapping” technique is employed.

The one year swap rate represents a single fixed payment, with the first discount
factor calculated as follows:

1
di =
1 + Ai Ri

Where Ri is the one year euro swap rate quoted vs. 3 month Euribor® in nominal
terms. As per the example, Ri =0.00599.

The swap rates for two years and beyond cover multiple annual fixed payments.
The bootstrapping methodology needs to take into account earlier annual
payments to calculate the zero discount factor for each subsequent payment;
calculated as follows:

1 - Ri ∑ i-1
j=1 Aj dj
di =
1 + Ai Ri

Euro Swapnote® Market Price

The market price of Swapnote® futures can be calculated using forward par swap
rates as of the contract’s effective date. Euro Swapnote® futures effective dates
follow the IMM convention, i.e. Swapnote® futures can be calculated using IMM
par swap rates.

Euro par swap rates represent the annual fixed rates payable on a fixed-for-
floating interest rate swap of different term-to-maturities. Euro par swap rates
are established on the basis that the value of a par swap at the start of the swap’s
life is zero. To have the starting value equal to zero, the fixed rate on the swap
has to be set such that the present value of the swap’s fixed payments equals the
present value of the swap’s floating payment.

The IMM par swap rates can be calculated using a forwarding curve with future
payments present valued using a discounting curve as follows:

For a par swap: P V fixed = P V floating

P V fixed = fixedrate x ∑ daycount n x discount n

P V floating = ∑ floatrate m x daycount m x discount m

∑ floatrate m x daycount m x discount m

Re-arranging: fixedrate =
∑ daycount n x discount n
Example: 2 Year IMM par swap rate quoted vs. 6 month Euribor
Valuation Date: 12 June 2012
IMM Date: 20 June 2012

FIXED SIDE FLOATING SIDE

EONIA DISCOUNT 6M EURIBOR EONIA DISCOUNT
PAYMENT DATE DAYCOUNT (DISCOUNTING (FORWARDING DAYCOUNT (DISCOUNTING
CURVE) CURVE) CURVE)
20 Dec 12 0.937% 0.50000000 0.99862
20 Jun 13 1.00000000 0.99742 0.821% 0.50000000 0.99742
20 Dec 13 0.836% 0.50000000 0.99600
20 Jun 14 1.00000000 0.99400 0.938% 0.50000000 0.99400

SUM 1.99142 0.017598

FIXED RATE = 0.017598 / 1.99142 = 0.884% (to 3 d.p.)

Using this technique, IMM par swap rates can be calculated for all relevant
cashflows in the 2, 5 and 10 Year € Swapnote® contracts.

2 YEAR € SWAPNOTE®
ZERO COUPON
ANNIVERSARY IMM PAR SWAP DISCOUNTED
MATURITY DAYCOUNT DISCOUNT CASHFLOW
DATE (IMM) RATE CASHFLOW
FACTOR
1 20 Jun 13 0.607% 1.00000000 0.99396276 6.00000000 5.96377656
2 20 Jun 14 0.884% 1.00000000 0.98253670 106.00000000 104.14889020
VALUE 110.115

5 YEAR € SWAPNOTE®
ZERO COUPON
ANNIVERSARY IMM PAR SWAP DISCOUNTED
MATURITY DAYCOUNT DISCOUNT CASHFLOW
DATE (IMM) RATE CASHFLOW
FACTOR
1 20 Jun 13 0.607% 1.00000000 0.99396276 6.00000000 5.96377656
2 20 Jun 14 0.884% 1.00000000 0.98253670 6.00000000 5.89522020
3 22 Jun 15 0.985% 1.00555556 0.97090894 6.03333336 5.85781730
4 20 Jun 16 1.133% 0.99444444 0.95577373 5.96666664 5.70278323
5 20 Jun 17 1.293% 1.00000000 0.93742789 106.00000000 99.36735634
VALUE 122.79
10 YEAR € SWAPNOTE®
ZERO COUPON
ANNIVERSARY IMM PAR SWAP DISCOUNTED
MATURITY DAYCOUNT DISCOUNT CASHFLOW
DATE (IMM) RATE CASHFLOW
FACTOR
1 20 Jun 13 0.607% 1.00000000 0.99396276 6.00000000 5.96377656
2 20 Jun 14 0.884% 1.00000000 0.98253670 6.00000000 5.89522020
3 22 Jun 15 0.985% 1.00555556 0.97090894 6.03333336 5.85781730
4 20 Jun 16 1.133% 0.99444444 0.95577373 5.96666664 5.70278323
5 20 Jun 17 1.293% 1.00000000 0.93742789 6.00000000 5.62456734
6 20 Jun 18 1.436% 1.00000000 0.91730149 6.00000000 5.50380894
7 20 Jun 19 1.557% 1.00000000 0.89638778 6.00000000 5.37832668
8 22 Jun 20 1.663% 1.00555556 0.87474438 6.03333336 5.27762445
9 21 Jun 21 1.752% 0.99722222 0.85313729 5.98333332 5.10460477
10 20 Jun 22 1.833% 0.99722222 0.83107561 105.98333332 88.08016339
VALUE 122.79

Further Information
Interest Rate Derivatives
+44 (0)20 7429 4640
rates@theice.com

theice.com/products/futures-&-
options/financials/interest-rates

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