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Home / Financial Tools / Interest Rate Swap Valuation & Hedge Effectiveness Tester

Graduate-Level Modeling · Derivatives & Hedge Accounting

Interest Rate Swap Valuation & Hedge Effectiveness Tester

A swap is only as good a hedge as its terms match what it's hedging. This tool prices the swap, bumps the curve, and tells you exactly how effective the offset really is.

How To Use This Model

Reading This Tool

Enter the swap's notional, fixed rate, remaining tenor and the current discount curve level, then drag the rate shock slider.

The tool values both swap legs, computes DV01 by bumping the curve, and runs a dollar-offset hedge effectiveness test against a matching fixed-rate exposure, so you can see exactly when a notional mismatch pushes a hedge outside the classic 80–125% effectiveness band.

Swap Terms

Hedge Effectiveness Test

The hedged item is modeled as a fixed-rate bond with the same coupon and tenor as the swap's fixed leg, discounted on the same curve, the classic textbook hedge-effectiveness setup.

Swap Valuation

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Mark-To-Market Value

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DV01 (Per 1bp)

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Hedge Effectiveness Ratio

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Swap Value Across A Range Of Parallel Rate Shifts

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Why The Floating Leg Formula Looks So Simple

Between reset dates, a floating-rate leg is always worth par immediately after each reset, since its next coupon is set to the current market rate. That collapses the entire floating leg's present value to Notional × (1 − discount factor to maturity), no need to project every future floating coupon individually.

What This Effectiveness Ratio Is Actually Measuring

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IAS 39's Bright Line vs. IFRS 9's Principles

IAS 39 required a hedge to fall within 80% to 125% dollar-offset to qualify for hedge accounting, a rigid, often arbitrarily failed test. IFRS 9 replaced this with a principles-based "economic relationship" test and an assessment of whether the hedge ratio itself is designed to create an imbalance. The 80–125% band shown here is retained purely as a teaching benchmark, not a live IFRS 9 requirement.

Value Change At The Chosen Shock: Swap vs. Hedged Item

Derivatives Valuation & Hedge Accounting

The Core Formulas

Fixed Leg = Σt=1..n (Fixed Rate/freq × Notional) × DF(t) (coupon stream only, no principal exchange)
Floating Leg ≈ Notional × (1 − DF(n)) (coupon stream only, using the par-reset shortcut)
Swap Value (Pay Fixed) = Floating Leg − Fixed Leg
DV01 = [V(r−1bp) − V(r+1bp)] / 2
Effectiveness Ratio = |ΔSwap / ΔHedged Item|

When To Actually Use This Model

  • Teaching swap valuation and cash flow hedge accounting mechanics in a derivatives or treasury management course.
  • Quick sanity-checking a swap's mark-to-market or DV01 against a dealer quote or treasury management system output.
  • Illustrating how a notional or maturity mismatch between the swap and the hedged item degrades hedge effectiveness.

Key Assumptions & Limitations

  • Uses a single flat discount rate for the entire curve, real swap desks build a full forward curve from market instruments (OIS, futures, swap rates) and bootstrap discount factors period by period.
  • Ignores counterparty credit valuation adjustment (CVA/DVA), bid-offer spreads, and collateral/funding valuation adjustments that matter for real trading book marks.
  • The hedged item is simplified to a plain fixed-rate bond, real hedged items often carry prepayment options or other embedded optionality that changes their rate sensitivity.

Foundational Reference

Hull, J. C. Options, Futures, and Other Derivatives. Pearson. International Accounting Standards Board. IFRS 9 Financial Instruments, Hedge Accounting chapter.

Need the bond side of this priced too?

Open The Bond Pricing & Duration Tool →