In my texts of swap valuation, the fixed leg is decided by calculating the following equation, say for a swap agreement where:
Fixed Leg : $s(1)=s(t)$
Floating Leg : 1 year LIBOR - 25bps
Term = 2 years
s(t) is calculated as:
$\frac{s(1)}{[1+r(1)]} + \frac{1+ s(1)}{[1+r(2)]^{2}} = 1$
So in effect, s(1) is independent of LIBOR plus/minus X.
Kindly explain, what is the real life implications of it? Does it imply that the payer of the SWAP( one who gives fixed leg) can arrange another cash flow stream with X% yield?
Thank you! Soham