# Expected Cash flows of a Floating Rate Note

How would one calculate the expected cash flows of a floating rate note?

Given a yield curve corresponding to the underlying of a floating rate note, would it be sufficient to compute the forward rates and use them to calculate the future value of the coupon payments? This would be in line with the classical (textbook) single yield curve valuation of the FRN, but I wonder what the industry approach would be.

Would one still do it in this way or would one take an interest rate model (which?), simulate many scenarios and take the averages like Monte Carlo? Are there other ways? Let's assume defaults are not of interest.

• You very much need to take into account the correlation of discounting with the payments - if it's on the same rate them the correlation is very high. – will Apr 11 '17 at 20:44
• @will your comment makes little sense to me – SmallChess Apr 11 '17 at 23:48
• @SmallChess if you have some future payment based on a random variable, then what you normally do is take the expected value of the future payment, and then discount it using the zero curve - i.e. $\mathbb{E}[X]P$ where $P$ is the discount factor. This is often fine as the discount factor is not correlated with the variable. If the above random variable was the OIS rate though, then it will be correlated with the discounting. The result is that when you have a higher rate, such that you'd get more money, it is more strongly discounted, and when it is lower, it is less strongly discounted. – will Apr 12 '17 at 6:42