I was hoping that I can get help on a simple yet not so straight forward topic :
Looking at valuing the costs of holding an IRS in the books this would entail marketed-to-market due to price movements in addition to Carry & roll down.
My question is specific to Carry of an interest rate swap.
On an IRS there would a fixed leg and a floating leg, assume that we are running a 5 year IRS where we are paying a USD fixed rate quarterly and receiving 3m Libor floating quarterly .Assume 5y spot rate is 2% & 3m libor is 1.3%
Intuitively the 3 month carry would be (spot rate - libor ) , in our case 2%-1.3% quarterly
My question is why is it to calculate carry the following is used instead:
Carry = forward rate - spot rate
In our case (4.75 years IRS starting in 3 months) - ( 5y spot rate )
please explain to me like I'm a 6 year old
Any links or txt that you can provide would be appreciated