How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity).
It's used to reduce the exposure and resulting charges i.e as a risk mitigation technique. But exactly how to model this through replication or adjustment etc.
If the MtM is settled and the fixed rate reset every period, then the exposure in the future is at most the BPV times the swap rate change over one period, easily modeled within any interest rate model framework.
It isn’t clear to me what question you’re asking when you say “exposure”.
If you mean MtM exposure then at the recoupon point the exposure is zero. This is because the fixed rate has been re-determined to ensure the PV of both legs (pay and receive) is zero.
If you mean what is the MtM exposure in risk terms ie how sensitive the position is, in monetary terms, to future changes in market rates then this is DV01 (x) change in market rate. This is same principle as revaluing a bond for a parallel shift in the yield curve.
I presume you are not asking how to calculate the DV01 of an IRS as this is no different for a recouponed position as a non-recouponed position.
Hope this helps.
