How is the BPV liability for an interest rate swap calculated?

The calculation of the BPV (Basis Point Value) liability for an interest rate swap involves assessing how changes in interest rates will affect the present value of the swap's cash flows. In the context of swaps, BPV measures the change in the value of a position for a one basis point (0.01%) change in interest rates.

The correct approach involves adding the product of the notional amount (NA) and the BPV of the swap adjusted for how much a basis point will impact the value. This is represented as BPV asset plus the product of the notional amount and the BPV of the swap divided by 100, which correctly incorporates the impact of the notional amount and indicates how much the value will change for 1 basis point.

The formula inherently captures the direct relationship between interest rates and the valuation of the swap. By appropriately combining the BPV asset with the calculated adjustment based on the swap’s characteristics, one derives the liability correctly.

This approach reflects a comprehensive understanding of how interest rate movements affect the value of financial derivatives such as swaps, emphasizing the importance of both the notional size and the specific BPV associated with the swap. Other formulations do not align with this rationale nor accurately describe how liabilities are derived in