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.

  • 2
    $\begingroup$ May you provide a simple example. $\endgroup$
    – Hedonist
    Jan 29 '18 at 20:36

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